Models of Changes in Managerial

Salaries in Five Economies

~~

GERALD D. NEWBOULD
Department of Health,Education and Welfare,Washington, DC, USA

JOHN R. SPARKES
University of Bradford, Management Centre, Bradford, UK

International comparisons of many kinds are hindered by the lack of data that are consistent between
countries. This has been the case particularly with comparisons of managerial remuneration and, along with
the lack of consistent data, there has been no satisfactory theory of differentials in managerial remuneration
either in absolute terms for example, as between a given-status manager in, say, Canada and the UK or in -
-
relative terms for example, the Merential between two managers of M e r e n t status in each country. This
article uses some recently poblished, and expensively gathered, data on managerial remuneration in five
countries with the purpose of extending the usage of the data, which were published more or less merely as
information, and introducing some tentative steps towards a better understanding of absolute and relative
differences in managerial salaries.

MACRO-ECONOMIC CHANGES 1969-1975
This section highlights the general changes in the
five economies which took place over the period
1969 to 1975 in order to put the managerial
salaries into perspective.
Column 1 of Table 1 shows how the level of
employment in the economies changed. In all cases
the level of employment increased and the
immigration-countries showed the highest in-
creases. Column 2 is immediately necessary to put
Table 1 into true perspective, for while employment
in all the economies has increased there have been
greater increases in unemployment. Indeed, one of
the paradoxes of the advanced capitalist economies
is that they are now, as in 1975, employing more
people than ever before, yet they also have more
people unemployed.
Thus, the conclusion from columns 1 and 2 of
Table 1 is that the economies have been expanding
employment to historically high levels, while at the
same time increasing, in some cases dramatically,
the number unemployed.
Column 3 shows that the average number of
hours worked has decreased in all the economies,
presumably, at the margin, relieving the unemploy-
ment increases in column 2. While average hours
worked have decreased, column 4 suggests that real
income has, on average, risen. Column 4 illustrates
the manoeuvring necessary in the absence of ideal
data. Ideally, samples or measures of average real
incomes would have been used, but instead gross
domestic product (GDP), a measure of the total
value of goods and services produced by an
economy, after allowing for inflation, has been di-
vided by the numbers employed. (This is, for the
purposes of this article, itself ‘more ideal’ than the
more usual and more readily available GDP per
capita.)

Table 1. Indices of Changes 1969-1975

1 2 3 4 6 a
AW.0.
houn GDP cer Ernpiownant GDP
wodlsd .eonOmk.ily in ofpublic
~mpl-nt. Ummpiwmam prrmlr acUvop.~n manuf.cturino metor
1969 1976 1976 1976 1976 1976 1976
Australia 100 114 290 94 107 96 125
Canada 100 122 147 96 103 101 111
France 100 107 352 92 117 98 117
UK 100 102 168 93 110 90 129
USA 100 109 243 97 102 91 100
Excluding agriculture.
(Sources: UN Statistical Yearbook (several issues) supplemented by national accounts.)
ccc-0143-6570/80/0001~004$04.00
4 MANAGERIAL AND DECISION ECONOMICS, VOL. 1, NO. 1, 1980 @ Heyden & Son Ltd, 1980
 Finally, some background data upon the distribu-
Table 2. Illustration of Job Evaluation
tion of employment and G D P are appropriate. Col-
umn 5 shows that employment in manufacturing Levels and Related Job Title
HAY-MSL JOb
has decreased in all the economies except for Jab units Specimen jab title level
Canada. Since, again with the exception of Canada, 300 Foreman A
there is a continuation of the long-established trend 450 General Foreman AIB
of decreasing agricultural employment, the figures 600 Superintendent B
900 Production Manager C
in column 5 are showing the trend towards employ- 1200 Works Manager D
ment in the service sector. While the definition of 1800 Manufacturing Manager E
service sector is wider than the definition of the 2400 General Manager F
public sector (for example, the former includes 3300 Managing Director G
~

privately-owned insurance companies and banks),
in the absence of data on the service sector, data on
the public sector are shown in column 6. The data
are shown in the form of the change in the propor-
tion of G D P accounted for by the public sector.
One economy, that of the USA, shows no change
while the others show large or huge increases in the
public sector's importance.
Over the period 1969 to 1975 the five econo-
mies, Australia, Canada, France, UK and USA,
expanded to new levels of employment and pros-
perity, those working worked fewer hours for
higher monetary rewards and there was a marked
movement (except in Canada) towards employment
in the service sector. Unfortunately, one cost of
these improvements and changes was an increase,
sometimes huge, in the number of persons unem-
ployed. Apart from this summary, the importance
of the tables is that they d o not reveal any notice-
able differences among the five economies; and
while there would obviously be differences as more
and more macro-economic data were analysed,
there is nothing at the macro-level to lead to alter-
native explanations for the differing observations
revealed by the survey data on managerial salaries.
MANAGERIAL SALARIES 1969-1975
This article uses as its source of managerial data a
survey carried out by a consulting firm, HAY-MSL
Ltd, for the (UK) Royal Commission o n the Dis-
(Source: 'Background Paper No. 2toReportNo.3',
RoyalCommissionOntheDistribution of Incomeand
Wealth, HMSO (1976).)
tribution of Income and Wealth. The data were
published as 'Background Paper No. 2 to Report
No. 3' and neither comment upon, nor conclusions
from, this information figured noticeably in the
Commission's work.
The consulting firm was asked by the Commis-
sion to provide data on managerial salaries in a
number of countries. Apart from the UK the other
countries were chosen because data as comprehen-
sive as those for the UK were possible. They in-
cluded Australia, Canada, France and the USA.
The survey period was July 1969 to July 1975.
To allow international comparison, HAY-MSL
data were based o n common job evaluation criteria
and methods. Any system of job evaluation con-
tains a strong subjective element, but the Commis-
sion was satisfied that the application of a single
system, which at least ensured that the standards of
judgement used in different companies and differ-
ent countries were comparable, was the most reli-
able. The HAY-MSL method of job evaluation
appraises each job according to a number of factors
of job content which are combined to give a total
evaluation exoressed as a number of units. A , iob-
can then be ranked in comparison with other jobs,
so that there is a series of job levels, referred to by
the letters, A, A/B, B, C, D, E, F and G, which
approximate steps in career progressions in man-
agement. Table 2 shows these job evaluation levels

JOHN SPARKES, BA, MSc.Econ, PhD is Senior Lecturer in Managerial Economics and
Deputy Chairman of the Undergraduate School of Studies in Management and Administ-
ration at the University of Bradford Management Centre. He is co-author of the books,
Modern Managerial Economics, Trade and Growth and Monopoly, and joint editor of
Corporate Strategy and Planning. He has contributed numerous articles to books and
journals in the economics, management and industrial fields and is a member of the
editorial advisory board of Managerial and Decision Economics.
Address: University of Bradford, Management Centre, Emm Lane, Bradford, West York-
shire BD94JL. UK.
DR. GERALD D. NEWBOULD is currently policy advisor at the Department Of Health,
Education and Welfare in Washington, DC, USA, a position he has held since the summer
of 1979. He is on leave from his post as Professor and Chairman of Finance at Cleveland
State University, USA. He was formerly Professor of Economics at the University of
Bradford, UK, and has held visiting professorships in South Africa and Canada. He is the
author or co-author of six books and over fifty articles in journals ranging from the British
Medical Journal t o Public Finance Quarterly.
Address: Department of Health. Education and Welfare, 400 Maryland Avenue S.W.,
Room 4662, Rob-3, Washington, DC 20202, USA.

@ Heyden & Son Ltd, 1980 MANAGERIAL AND DECISION ECONOMICS, VOL. 1, NO. 1, 1980 5
 In the sociological theories, perhaps the most
Table 3. Observed Managerial Salaries. July 1969 developed is equity theory, or membership motiva-
and July 1975 tion theory, which at its simplest implies that equity
1969(1smA- loo1
A b A / B B C 0 E F G is satisfied when actual salary equals, within some
Australia 100 126 152 204 245 320 396 508 defined limits, the salary felt to be fair by the
Canada 100 125 156 213 263 369 469 600 person doing the job. This clearly measures abso-
France 100 144 186 268 344 526 712 NIA
875
lute salary level satisfaction. (While clearly in any of
UK 100 133 173 247 321 480 633
USA 100 129 158 213 267 376 483 663 the ‘absolute’ theories, a change in the absolute
ls76(1smA= loo)
state could lead to a prediction of a change in the
A b b B B C D E F G absolute salary, it is fair to classify these absolute
Australia 171 219 263 354 433 558 667 829 theories as absolute.) Empirically the equity theory
Canada 159 200 240 326 398 535 670 866
France 214 294 376 548 708 1008 1376 N/A has proved difficult to work with but it does have
UK 213 276 343 472 611 880 1130 1505 validity. However, it cannot be applied to the type
USA 142 181 220 297 367 507 651 874 of data in Table 3 since it is unlikely that any group
1976(1975A= loo) of managers (from which each observation in Table
A b N B B C D E F G
3 is derived) will have a common felt-fair salary.
Australia 100 128 154 207 254 327 390 485
Canada 100 126 152 206 250 337 422 546 Expectancy (motivation) theory is also an absolute
France 100 138 176 256 331 472 644 NIA level theory and while there are several conditions
UK 100 130 161 221 287 413 530 705 inherent in the theory the basic one is perhaps that
USA 100 127 155 209 258 356 458 615 performance leads to rewards. Again this is not
Gross of tax. testable with the data in Table 3. Content (motiva-
1969 ‘A’ salaries are: Australia, $A4800; Canada, $CB000; tion) theory implies that salary can only prevent
France, FF25000; UK, f1500; USA, $US9000. (At July 1969
ratesof foreign exchange in US$: 5362;7440;5050;3585;9000 dissatisfaction and cannot motivate. It is an abso-
respectively.) lute level theory and again is not testable with the
(Source: As Table 2 (error in 1975 Canada D salary cor- type of data available here. Theories based on the
rected).)
sociology of labour markets, social stratification or
status are again valuable in understanding motiva-
and the type of job to which they might apply in a
tion and expectations, particularly when compari-
hypothetical company.
sons, including salary, are made of management
Table 3 presents the survey data. In all countries
with another occupation; but again the data in
there is a positive differential between one job level
Table 3 do not match any testable hypotheses from
and the next in both 1969 and 1975. Other than
these theories. Theories associated with the con-
this, ther,e are no patterns in the three parts of
cepts of work groups, peer groups or reference
Table 3. In respect of the changes between 1969
groups offer much more promise and they are con-
and 1975, in 34 of the 39 pairs of observations the
cerned primarily with changes in salary or other
differential has decreased and in five there has been
norms for the group. However, comparative data
an increase. Of those five, four are in Australia and
one in Canada. However, while the maximum in- for groups other than management would be
needed to utilize the data in Table 3.
crease in differential was nine percentage points
The conclusion of a review of these and other
(+3.6%), the largest decrease was 170 percentage sociological theories must be that they are not
points (-19.4%). appropriate to the task at hand. They have been
The data in Table 3 were expensive to gather but developed well in advance of the availability of
were used primarily for information and presented empirical observations, and while piecemeal empiri-
only as a background paper to the Commission’s cal tests of each have been made, often successfully,
work. The task is to see if the data can be used to they are not appropriate to offer other than a
provide a better understanding of managerial background understanding of the observations that
salaries. are in Table 3.
Economic theories of compensation probably
COMPENSATION THEORIES began in the Middle Ages with the concept of a
status-related wage which ensured that the OCCU-
Theory and data both gain when developed to- pant stayed in that status. Clearly an absolute level
gether, but, in compensation matters, the theory is theory! That t h e o j is hardly more palatable to
significantly in advance of the data, with the result modern taste than the subsistence theory (wages
that much of the theory has no applicability when equal the cost of reproduction of workers). Clearly
confronted with available data. This section will this is a ‘change’ theory. Historically the next to
quickly review compensation theories. arise was the wages fund theory which in essence
Compensation theories can be broadly divided asserts that the total income in the economy is fixed
into sociological and economic theories; each of and what one person gains another person or factor
these can be subdivided into theories which explain of production loses. This is again a theory relating
the level of compensation and those which explain to changes in salaries and received interest in the
changes in the level of compensation. mid-1970s when, due to inflation and costly energy,

6 MANAGERIAL AND DECISION ECONOMICS, VOL 1, NO. 1, 1980 @ Heyden & Son Ltd, 1980
zero growth for the Western economies suddenly ~~ ~~ ~

became an unaccustomed possibility. This theory Table 4. GDP and Managerial Salan'es' 1%9
1689 GDP
has some applicability to Table 3, but it can be best m
regarded as a special case of Neo-Keynesian dis- a*-
ompbvad
tribution theory, as discussed below. Marxian wage PHMnb Job M
theory was developed next and being based upon A N 0 0 C 0 E F G
USA (1111911 1 1 1 1 1 1 1 1
the subsistence theory has not stood the test of
Canada (2) 9622 2 2 2 2 2 2 3 3
time. In the economics textbooks, the most space France (3) 7372 4 3 3 3 3 3 2 T
on compensation is given to marginal productivity Australia (4) 6483 3 4 4 4 4 5 5 5
theory - as productivity changes at the margin then UK (514393 5 5 5 5 5 4 4 4
so too can compensation either at the macro-level
or the person-level. This theory of changes in com- .Gross of tax.
In 1969 prices in US$ at 1969 exchange rates.
pensation also has some applicability to Table 3, 'G' for France is not available with consistent data; rank
but again it can be included as part of Neo- position assumed from trend.
Keynesian distribution theory. Next to be de- (Sources: As Tables 1 and 2.)
veloped after marginal productivity was Keynes' ~

theory of full employment national income; it con- Table 5. GDP and Managerial Salarieso 1975
centrated originally on employment rather than in- 1976 GDP
come, but in its Neo-Keynesian form the emphasis p.r
. M y -
shifted to income. In essence, the theory asserts em@oysd Job I d
p.nmb A N B 0 C 0 E F G
that changes in income are associated with changes
USA (1117076 1 2 2 2 2 2 2 2
in employment and with changes in the determin- Canada (2115936 3 3 3 3 3 3 3 3
ants of economic growth (investment, technological Australia (3)14902 4 4 4 4 4 4 4 4
advances, etc.). This theory has direct applicability France (4) 14700 2 1 1 1 1 1 1 1"
to Table 3 (for example by comparing Table 3 and UK (5) 9713 5 5 5 5 5 5 5 6
Table 1). Other theories in economics have con- .Gross of tax.
centrated upon the fact that there is no longer a In 1975 prices in US$ at 1975 exchange rates.
='G' for France is not available with consistent data; rank
competitive market in hiring and firing, and thus position assumed from trend.
attention should be given to institutional theories (Sources: As Tables 1 and 2.)
and bargaining theories, in which trades unions
eight job levels, the GDP rank is repeated in only
figure significantly. Management is very poorly un-
four. At the remaining four job levels, there are
ionized, however, and then only at the lower levels
and hence managers still typically operate in a three rank patterns.
Table 5 repeats Table 4 but for July 1975. In
market which approximates the predictive accuracy
1975, none of the eight job-level rankings displays
of the competitive model.
the GDP ranking. However, for seven of the eight
In terms of actually explaining a given compensa-
job levels there is a common ranking in which
tion or a given change in a compensation, economic
France is at the head, and the rank order is then
theories have fared empirically no better than the preserved for the remaining four economies.
sociological theories. However, Neo-Keynesian dis- The conclusion is that GDP (per actively-
tribution theory does give some operational employed person) is not a good predictor of mana-
guidelines towards analysing Table 3. gerial salaries. Alternative testable hypotheses to
explain the absolute level of managerial salaries are
ABSOLUTE LEVELS OF MANAGERIAL not apparent in either sociology or economics.
SALARY
CHANGES IN MANAGERIAL SALARIES
Marginal productivity theory operating at the 1969-1975
macro-level would lead to a prediction that the -~

absolute level of managerial salary is related to the The second part of Table 3 can be reworked to
value of the revenue product for the marginal man- show more clearly the changes in the observed
ager. In operational terms, this amounts to saying salaries over the period July 1969 to July 1975. The
rothing more than that a richer economy can afford result is Table 6. No single pattern is obvious;
to pay more. Thus this section compares the GDP
of each economy (as a measure of its national Table6. Changes in Managerial Sd~es'
income as a proxy for its marginal productivity) 1%9-1975 (%I
with the observed levels of managerial salaries. A A I B B C D E F G
Australia 71 73 73 74 77 74 68 63
Table 4 shows the rank positions for each of the Canada 59 60 54 54 514543 44
five economies for the job levels at July 1969 France 114 104 102 105 106 92 93 N/A
arrayed against the rank position determined by the UK 113 108 98 91 90 83 78 72
GDP per actively-employed person. GDP per USA 42 41 39 39 38 35 35 32
actively-employed person separates the five 'Gross of tax.
economies by at least $US900 (13.7'1'0). Of the (Source: As Table 2.)

0Heyden & Son Ud. 1980 MANAGERIAL AND DECISION tCONOMICS, VOL. 1, NO. 1, 1980 7
 how this has changed over the period being anal-
Table7. Changes in Managerial Salaries’ ysed. For the USA the share of GDP going to
1%9-1975 (%) compensation of employees has maintained itself
A W B B C D E F G and for other countries has shown growth at rates
Australia 64 64 61 58 60 57 52 50
which are abnormally large by historical standards.
Canada 56 56 50 53 53 56 59 65
France 110 103 99 98 99 90 93 N/A Thus, a model must take account of this fact if it is
UK 94 90 87 79 70 56 48 47 to have a chance of satisfactorily explaining ob-
USA 38 37 36 35 32 29 28 28 served changes in managerial salaries.
Netoftax,marriedrnenwithtwochildrenagedunder 11. The only step needed to convert the observed
(Source: As Table 2.) changes in Table 7 into data for the model is to
adjust for changes in the actively-employed popula-
however, there is a tendency for the percentage tion, as shown in column 1 of Table 1. (In effect,
increases to decline as the job level increases. (The column 4 of Table 1 has been reworked to take
UK shows the clearest example of this trend.) The account of the changes in factor shares in the
data can be further reworked to show the changes changes in GDP.)
after personal income taxes have been levied (on Economic growth is shown as the second compo-
the usual basis of a married man with two children nent in the list of causes of postulated changes in
aged under 11).The data are presented in Table 7. the redistribution of income at the micro-level. As
Again a unique pattern is absent but the decline can be inferred from column 4 of Table 1, the
pattern is present (see UK) or the syncline (see
growth in GDP was substantial in most of the
Canada).
economies - again some economies, like the UK,
Normally analysis stops at this point, as it did in
Australia and Canada, were in a period of excep-
the Royal Commission Reports. In what follows the
tional growth by historical standards. In all the
suggestion is that the analysis can be taken further:
economies there was extra national income. The
the changes which have taken place in managerial
problem for the model is to decide upon a method
salaries over the 1969-1975 period have several
of allocating this extra income. Two methods are
causal components and two tentative models will be
advanced here, and comment upon them will be
put forward in an effort to lead to a better under- made later.
standing of the changes. One method of allocating the extra income is to
The causal components, which can be treated assume, quite simply, that growth was allocated
separately are offered as: (a) redistribution of in- equally on a per capira basis so that everyone,
come at the macro-level, (b) economic growth, (c) regardless of existing personal salary, or wealth in
inflation and (d) fiscal drag. The overall change is 1969, shared equally in the extra income over the
the postulated redistribution of income at the six subsequent years.
micro-level, leaving any difference between a + b + The alternative method is to assume that the
c + d and observed redistribution of income at the growth was allocated on a basis reflecting his 1969
micro-level, as due to other factors (to be men- economic status so that each person received, not a
tioned later) or simply ‘unexplained’. The compo- constant absolute increase as above, but a constant
nents (a) to (d) require some explanation. percentage increase. Taking the July 1969 salary as
Redistribution of income at the macro-level can the basis for determining this percentage increase
be regarded as equivalent to the wages fund theory will, in effecf, maintain the differential salary struc-
of ‘how the cake is shared’ or in other words, how ture as at July 1969. In short, a person’s 1969
the total of GDP is shared among the various factor salary determined his share of the extra income
claimants, such as compensation of employees, rent, available through economic growth.
interest and profits. Clearly the area of interest here Factor (c) in the above list presents no problems.
is compensation of employees, and Table 8 shows Inflation as measured by each country’s retail price
index is taken out of the data and thus for each
Table 8. Compensation of Em- country, the currency has constant internal purchas-
ployees as a Percentage ing power.
of GDP The fourth factor, fiscal drag, similarly presents
1969 1976 ChMae no problems, other than computational ones. Since
Australia 52.3 60.0 +7.7 personal taxes are a government decision, changes
Canada 54.6 57.2 +2.6 in net-of-tax incomes can be adjusted for changes
France. 36.0 45.4 +9.4 in fiscal policy. This factor will be relevant in the
UK 59.1 67.3 +8.2
USA 61.3 61.4 +0.1 second stage of the model, to see whether fiscal
policy has ameliorated or exacerbated the other
Represents wages and salaries
only, and excludes employers’ con- component changes.
tributions to pension, insurance Leaving aside fiscal drag, and thereby concentrat-
schemes, 8tC. ing on changes in salaries gross of tax, the three
(Sources: NationalAcounts of OECD
countries, OECD (1975) and Quarterly components (a), (b) and (c) produce the results in
National Accounts, OECD (19761.) Table 9.

8 MANAGERIAL AND DEUSION ECONOMICS, VOL 1, NO. 1.1980 0 Heyden & Son Ltd. 1980
 Table9. Postulated Changes in Gross Managerial Salaries
1969-1975 at constant 1969 prices
1 2 3
Change in
Change In GLW ovsnll
di.tribulion Per D.
m change In
MOlhod ot G W emplovsd dew
Australia Flat-rate 510 437 $A947
Percentage 16.8 14.4 31.2%
Canada Flat-rate 280 328 tC608
Percentage 5.0 5.8 10.8%
France Flat-rate 3624 799 FF4423
Percentage 27.6 6.1 33.7%
UK Flat-rate 172 148 f320
Percentage 15.8 13.6 29.4%
USA Flat-rate 17 -198 $US-181
Percentage +0.2 -2.7 -25%

For each of the five economies, there are two served 1969 salaries to give postulated levels of
rows in Table 9. The first row shows the changes managerial salaries in 1975. For purposes of com-
that can be expected between 1969 and 1975 in parison each observed salary in 1975 is then di-
managerial salaries if, with the adjustments just vided by its postulated equivalent and a figure of
described, extra income is allocated on a flat-rate, 100 is used to indicate a perfect match between
or per capita, basis. The second row shows the observed and postulated salaries.
postulated changes with the alternative possibilty The match between observed and postulated
that extra income is allocated on a percentage basis. salaries is shown in Fig. 1, where the solid line
Column 1 of the table shows the extra income (with indicates the flat rate allocation of extra income and
either of the two possibilities) that results from the
change in the distribution of GDP. Column 2 shows 120
the postulated impact upon managerial salaries of
economic growth if 1969 factor shares had been
'lo
A A/B B
.........
T
flat rote
percenloge
D E F G Joblevels

maintained, and column 3 shows the net effect of

columns 1 and 2.
Taking Australia as an example, the flat-rate 80 ...............'".............
system would provide each manager with an extra
$A510 on account of the change in the distribution I20 r m

:I[-
of the GDP and economic growth would add a
Job levels
further $A437, giving an overall increase in salary
of $A947 over the six year period. If the method of
90 .........................
allocation was a percentage one then each manager
would receive an increase of 16.8% from the
change in the distribution of GDP and 14.4% from
economic growth, increasing his salary overall by
31.2% and maintaining in terms of differentials the
1969 structure of managerial and non-managerial
salaries.
On the basis of Table 9, Australia is the normal
case since both the change in the distribution of
GDP and economic growth are approximately
equal and both add to the manager's salary; and
A A/B B C D E F G Joblevels
this is the case for Canada and the UK also. France
is similar, in that both components are positive, the
only distinction being that the increase due to the ..... ...........
change in distribution of GDP is 4.5 times the size
of the increase due to the change in GDP per
70 .........
person employed. The exceptional case in Table 9
is the USA since it shows a negligible increase due
to change in distribution of GDP and further, a A A/B 8 C D E F G Job levels
decrease in salaries due to the change in GDP per
person employed - overall a net reduction in mana- 90
gerial salaries in real terms.
Column 3 in Table 9 can now be added to (or Figure 1. Comparison of postulated with ob-
subtracted from in the case of the USA) the ob- served 1975 salaries.

0 Heyden & Son Ltd, 1980 MANAGERIAL AND DECISION ECONOMICS,VOL 1, NO.1, 1980 9
the dotted line indicates the percentage allocation
of extra income. Since the model is in a relatively
unexplored field of enquiry the match is generally
good.
The first impression from the individual charts in
Fig. 1 is that the lines, flat-rate or percentage,
typically fall below the 100 datum line indicating
that observed 1975 salaries were generally less than
postulated 1975 salaries. The second impression is
that the flat-rate line in general lies closer to the
datum line than does the percentage line. Therefore
both impressions indicate that in some monetary
sense managers in the five economies 'lost out'
(when compared with 1969) in the extra GDP they
helped to create - they received less than a per
capita and less than a percentage share in the
additional income.
The clear exception to these general impressions
is France where the percentage line is clearly the
better fit and a lesser exception is the USA where
again the percentage line lies closer to the datum
line.
The closest fit in Fig. 1 is the case of Canada
where the flat-rate system varies only within 4% of
the observed salaries. In Canada, it would appear
that irrespective of 1969 salaries and status all
levels of management have shared equally in the
extra income. The poorest fit in the flat-rate system
is France (however the percentage system is always
within 10% of the observed salaries). On the flat-
rate basis all managerial levels in France are sig-
nificantly higher in 1975 than the model postulated.
Since the percentage line is the better fit for France,
the comparisons suggest that differentials have been
largely maintained in France. The poorest fit for the
percentage system is the UK, where a managing
director is receiving only 66% of the postulated
salary, and there is a clear indication from the
model that managerial salaries have not kept pace
either with the increased share of GDP going to
employee compensation, or with economic growth.
More comment will be made about the flat-rate
and percentage systems chosen as the bases for the
two models in this section immediately after the
impact of fiscal policy is included in the models.
of taxation is by government action. Lack of correc-
tive action is referred to as 'fiscal drag'. Govern-
ment corrective action can be either a period-by-
period adjustment of allowances and tax bands or
their indexation to retail prices.
To see the impact of government policy upon Fig.
1, 1975 observed gross salaries were converted
back to 1969 prices and taxed at 1969 rates of tax.
Those net-of-tax salaries were then compared with
observed 1975 net salaries. (This technique has the
advantage over jobbing forward in that it avoids
assumptions as to managerial rates on incomes
which are higher due to real growth rather than due
to inflation.)
Figure 2 results from putting the 1975 observed
net salary over the 1975 salary at 1969 rates of tax,
and using 100 as the datum.
France is the easiest to interpret. The line never
varieq more than 2% from the datum - the result of
Government tax decisions and indexation. In
Canada there was fiscal boost, again the result of
Government decisions and partial indexation, with
the result that the lower levels of management were
treated neutrally by changes in the tax system and
the higher levels of management fared progressively
E loo-
1-
I10
1 F G Job levels
7
llot

~~ ~~~~

THE IMPAm OF FISCAL POLICY United Kingdom

Government policy in each country could amelior- A A/B B G Job levels

ate or exacerbate the tentative conclusions based on

Fig. 1. Since the rate of inflation was such that the
retail price index in none of the countries rose less
than 60% over the period 1969-1975, the Govern-
ment of each country had to take a series of deci-
sions. Each country has a multi-band tax system IlOt

(each succeeding band of taxable income is taxed at A A/B B c: D F G levels

J O ~

a higher rate) with the result that inflation carries

90
taxpayers into successively higher tax brackets even
though their real income need not have increased.
The only way to correct this increasing real burden Figure 2. Fiscal drag.

10 MANAGERIAL AND DECISION ECONOMICS, VOL 1, NO. 1, 1980 0 Heyden & Son Ltd, 1980
better. The USA experienced mild fiscal drag; Au-
stralia had more severe fiscal drag and the UK had
severe fiscal drag. In all three cases, the outcome is
the result of the absence of indexation and the
Government never cutting money taxes (i.e. adjust-
ing allowances or tax bands) by. as much as the rate
of inflation. Some indication of the extent of gov-
ernment inaction is the manager at level G in the
U K who in 1975 received less than four-fifths of
the net salary a neutral tax system would have
given.
Two models have been put forward. The models
differ only in the assumption about how extra in-
come available at the macro-level is shared at the
level of the person. One assumption was a flat-rate
share, the other a percentage share, and both mod-
els have been worked gross and net of personal
taxes. The comparisons between postulated and
observed salaries are perhaps sufficiently illuminat-
ing that some explanation of the flat-rate and per-
centage assumptions is called for.
FLAT-RATE AND PERCENTAGE
ALLOCATIONS
The rationale for the use of a flat-rate or a percen-
tage allocation of extra income is that it is intended
as a characteristic of political, social and economic
trends in the economies. It is intended that the
flat-rate basis in some way represents an
‘egalitarian’ path of progress. Similarly, it is in-
tended that the percentage basis characterizes a
‘capitalist’ path of progress where unequal rewards
and differentials are essential to the continuance of
the system.
With these characterizations, it would appear that
Australia, Canada and the UK have been following
the ‘egalitarian’ path over the period 1969-1975,
since the extra income that arose in this period,
when allocated at the flat-rate base, fits better ob-
served changes in managerial salaries. Equally, the
better fit in the cases of France and the USA,when
extra income is allocated on a percentage basis,
would imply that they trod the ‘capitalist’ path and
preserved the differentials at the differing levels of
management.
If fiscal policy is included in these generalizations,
it can be seen that fiscal policy in fact strongly
confirms the generalizations in the cases of Au-
stralia, the UK and France, and confirms less
strongly the generalization for the USA. Only
Canada, ‘egalitarian’ on the allocation of extra in-
come, conflicts with the fiscal policy which boosted
those at the higher salaries. Without a doubt, how-
@ Heyden & Son Ltd, 1980
MANAGERIAL AND DECISION ECONOMICS, VOL 1, NO. 1, 1980 11
ever, the UK is the clearest example among the five
of a country following an ‘egalitarian’ path since the
flat-rate allocation was an overstatement of the
extra income to the higher salary levels and fiscal
policy strongly reinforced this.
France is the clearest example of a nation follow-
ing the ‘capitalist’ path, for in real terms after tax
each managerial level was at least 20% higher in
1975 than in 1969, some three percentage points
(15%) ahead of GDP growth.
Characterizations need to be made with care,
because characterizations are by definition no more
than an extraction of the barest essentials. In this
article, however, the characterizations lead to re-
sults which can be directly compared with observa-
tions, and the comparisions between postulated re-
sults and observations lend some credence to the
characterizations.
The state of the art of postulating changes in
differentials is not well advanced in the literature
but, as an aid, two methods of allocating extra
income have been elucidated in this article based
upon political, social and economic concepts of
progress. When the postulated changes were con-
fronted with observations, a generally good fit was
obtained by one or the other allocation, and the
underlying thesis is that these methods of allocation
in some way are characteristic of each nation and
hence are relevant methods of analysing differen-
tials.
Other than these two possibilities, some econom-
ists would explain the allocation as the result of
changes in the supply of, and the demand for,
managers. As long as market prices do exist, supply
and demand must enter the allocation at some point
but, regardless, supply and demand lack empirical
content and hence can neither be tested nor provide
empirical postulates. In general terms, however,
evidence would be needed of decreasing demand
for and/or increasing supply of managers in Au-
stralia, the UK and the USA; neutral effects in
Canada and increasing demand for, and/or decreas-
ing supply of managers in France. A priori it is
difficult to substantiate this. Thus, whilst it is possi-
ble that economic forces are driving wages and
salaries towards greater or lesser degrees of in-
equality, perhaps the changes at the micro-level can
better be explained as trends in political, social and
economic policy.
Q Heyden &Son Ltd, 1980