Overcompensation: Tying corporate taxes to CEO pay

by Gary Cohn, Capital & Main

CEO PAY 2450496004_d95610dfe4_z_cc 320 x 187One night last year, as the public debate about economic inequality began to sharpen, California State Senator Mark DeSaulnier (D-Concord) was walking to the Berkeley premiere of a documentary film focused on that very subject. Inequality for All, narrated by former U.S. Labor Secretary Robert Reich, had been executive-produced by the man DeSaulnier was walking with that evening, Stephen M. Silberstein. At the time, DeSaulnier was casting about for ways to attack economic inequality and during their walk Silberstein, a software entrepreneur and philanthropist, mentioned an idea he’d been working on to help tackle the problem.

Until the 1980s, corporate CEOs were paid 30 times the amount the average worker received, but today, according to some conservative estimates, they make about 330 times that. What if, Silberstein proposed, state corporate taxes were tied to a company’s annual CEO compensation relative to its employees’ wages? DeSaulnier liked what he heard and so, earlier this year, he and State Senator Loni Hancock (D-Berkeley) introduced Senate Bill 1372, which embodied Silberstein’s concept.

The bill, which was drafted with Silberstein’s help, is designed to reward corporations that reduce their CEO-to-worker pay ratios, while punishing companies that exacerbate those differences. For example, if the chief executive at a company doing business in California makes 100 times more than a typical worker in the same firm, the company’s corporate tax rate would be reduced to eight percent from the current 8.84 percent. At a company where the chief executive makes only 25 times as much as a typical worker, the tax rate would be reduced to seven percent. But at a company where the CEO’s compensation is 400 times as much as the median worker’s, the tax rate would increase to 13 percent.

SB 1372 won the California Chamber of Commerce’s “job killer” seal of disapproval yet did surprisingly well on the Senate floor last May, receiving 19 “yes” votes to 17 “no” votes. However, California tax code requires approval by two-thirds of the legislature, rather than a simple majority, and so the measure did not pass.

DeSaulnier tells Capital & Main he was encouraged enough by the May vote to work to amend the bill and make it acceptable to corporate-friendly Democrats and to some Republicans if the measure returns for a vote this month. Among other possibilities, DeSaulnier says SB 1372 could be amended to ensure that extra tax revenue would go for economic development projects or small business ventures. Hancock emailed Capital & Main to say she is prepared to re-introduce the bill next year, if necessary.

The issue of CEO pay isn’t entirely new. The late Peter Drucker, an influential management consultant and author, believed that a company’s CEO should not be paid more than 20 times as much as the average employee, and he once called exorbitant CEO pay “a serious disaster.”

“People are clearly aware that CEOs make a lot more than average workers,” says Michael Norton, a professor at Harvard Business School who writes about economic inequality. In studying survey data, Norton and a colleague have found that Americans erroneously believe that the average CEO makes 30 times as much as the typical worker at his or her company; in fact, according to Norton, the actual pay ratio of CEOs to unskilled workers is 354-to-1.

“That shows some of the outrage about CEO pay underestimates how upset people will be if they understand the gap between CEO pay and that of average workers,” says Norton, whose findings are scheduled to be published in the journal Perspectives on Psychological Science.

It’s doubtful that anything DeSaulnier changes in his bill will satisfy all of SB 1372’s critics.

In an April 14 letter to DeSaulnier, the CalChamber said the bill menaces California’s economy and its workers’ jobs. “Increasing corporate tax rates as a means of attempting to influence executive compensation is simply bad tax policy,” wrote Chamber lobbyist Jennifer Barrera.

“California has already suffered from other states seeking to lure our companies out of state with incentive packages such as tax credits and subsidies,” the letter continued. “By almost tripling the tax rate, Senate Bill 1372 will exacerbate this problem as there is no question that any other state in the country will have a more business friendly tax environment than California.”

“That’s total bull,” Silberstein says. “[The bill] incentivizes corporations to reduce the amount of money they are giving to CEOs. It incentivizes raising the pay of workers and it’s not going to cause any jobs to be lost.” He notes that the bill has nothing to do with where a company locates its headquarters, but instead includes all publicly traded corporations that do business in the state. “No company is going to give up selling its merchandise in California,” Silberstein says. “It’s too big a market.”

“Henry Ford,” Silberstein adds, “paid workers twice the going rate in Detroit so they would have enough money to buy cars. As a result of that Henry Ford became rich.”

Silberstein is one of several wealthy business people in California and elsewhere who are fighting against economic inequality, although he has a somewhat lower profile than others in this group, who include billionaire businessman Warren Buffet, Seattle venture capitalist Nick Hanauer and Silicon Valley millionaire and one-time Republican candidate for Governor Ron Unz. (See “10 Business Leaders Who Just Say No to Economic Inequality.”)

The Marin County resident was the co-founder and first president of Innovative Interfaces Inc., a company that supplies computer software for the automation of college and city libraries. He serves on the board of advisors at the University of California at Berkeley’s Goldman School of Public Policy and has long been a supporter of progressive causes.

“It’s really clear that CEO pay has gone up and the pay of other workers hasn’t,” says Silberstein. “You have a growing discrepancy here. The question is, What can we do to incentivize people and corporations to reduce that discrepancy? The tax code is a way to do that.” As Silberstein sees it, California, which has long been a bellwether for the rest of the United States by passing environmental and public health regulations, is poised to become a leader in the fight against economic inequality: SB 1372 would be the first law in the nation to attack such inequality by reforming a state’s tax code.

The bill is supported by, among others, Robert Reich, who testified on its behalf before a state legislative committee and noted in an opinion article that CEO pay has skyrocketed over the past three decades while the median American worker has seen no pay increase at all, when wages are adjusted for inflation. The bill’s opponents make up a virtual Who’s Who of corporate and business interests, and, besides the Chamber of Commerce, include California Taxpayers Association, California Bankers Association, California Grocers Association, California Manufacturers and Technology Association, California Restaurant Association, California Retailers Association, Orange County Business Council and Silicon Valley Leadership Group.

Silicon Valley’s opposition doesn’t surprise Silberstein, who says that when technology companies are launched, they often begin with the attitude that everybody is more or less equal.

“What happens,” Silberstein says, “is that the corporate culture changes over time and management starts to think they are geniuses and workers are an expense rather than an asset.”

He cites, as an example, Apple, whose CEO, Tim Cook, according to one report, made 6,258 times as much as a typical worker at the company in 2011.

It won’t be easy for SB 1372 to get the required two-thirds majority, despite the anticipated modifications. DeSaulnier and Hancock will need to obtain the votes of virtually all Democrats and at least a few Republicans. In May, five Democratic Senators voted against SB 1372 on the Senate floor and two other Democrats did not vote. No Republicans voted for the bill. The five Democrats who voted “no” were State Senators Marty Block, Lou Correa, Cathleen Galgiani, Jerry Hill and Richard Roth; the two who did not vote were Senators Ronald Calderon, who has been suspended from office pending a corruption trial, and Norma Torres.

None of this fazes Silberstein, who points to the bill’s relative success in May.

“There is a growing awareness that what’s wrong with the economy is that workers’ wages are stagnating or falling even though the economy has become more productive,” he says. “All the excess money goes to the top. I think it takes a while for people to realize what’s going on in the economy. [The idea] that things are better off if rich people make more money — the so called trickle-down theory — it didn’t quite work.”

Photo: MTSOfan / Creative Commons

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