Can Cities, States Really Rein in Excessive CEO Pay?
It’s a good time to be a CEO in America.
Various studies show that CEOs of major corporations made hundreds of times what their workers earned in average pay last year. According to data compiled by the Associated Press, average CEO compensation at Fortune 500 companies rose to $12 million, roughly $800,000 more than in 2017.
That’s impressive, but $12 million would still be a pay cut for executives like Nike CEO Mark Parker, who hauled in just a tick under $14 million in compensation in 2018, 550 times the amount of the Swoosh’s $25,386 median salary. And it would be downright miniscule for Disney CEO Bob Iger, who raked in almost $66 million last year, a whopping 1,424 times the $46,127 median salary for a Disney worker. Much of Iger’s 2018 compensation was in long-term incentives associated with his new contract. His 2019 compensation is expected to be a relatively piddling $35 million.
Escalating CEO pay has for decades prompted calls for Congress to somehow limit executive compensation, with not a whole lot to show for it. But focus on the issue picked up steam in 2010 with the Dodd-Frank Wall Street Reform and Consumer Protection Act, which imposed greater regulation and transparency requirements on banks and other financial institutions. The Securities and Exchange Commission codified a final rule in 2015 that requires publicly-traded companies to disclose the ratio between CEO pay and the median salary of their workers.
With that disclosure has come a growing awareness of the sometimes-massive gap between CEO salaries and those of their employees. And as the rich get richer, a handful of bills aimed at curbing CEO pay are currently pending in both the U.S. House and Senate, including measures authored or co-authored by two Democratic presidential candidates, Sen. Elizabeth Warren of Massachusetts and Rep. Tulsi Gabbard of Hawaii.
The battle has also increasingly moved outside of D.C., where some states and local governments are now looking to address skyrocketing CEO compensation by hitting companies where they would likely feel it the most – in their bank accounts.
In 2016, Portland became the first city in America to endorse a tax on publicly-traded companies where CEO compensation is 100 times that of the median wage for the rest of the firm’s workers. That levy – a 10 percent hit if the ratio is 100/1, 25 percent if it is 250/1 or more – is forecast to bring up to $3.5 million of additional annual revenue into the city’s General Fund, with an emphasis on funding services for the city’s homeless population.
The city’s revenue director recently noted that at least 153 companies paid the tax this year, with an average bill of $15,800. The levies are imposed on top of the city’s current local profits tax, with the worker’s end of the ratio based on the median pay for all of a company’s employees wherever they might be in the world.
That last bit is an important distinction between what Portland is doing and the other large metropolitan area most likely to follow suit.
A ballot measure set to go before voters in San Francisco next March would impose an additional tax on a company’s gross receipts, ranging from 0.1 percent on corporations with a 100/1 CEO/worker pay ratio to 0.6 percent for companies where the ratio is 600 or more to one. But the San Francisco ratio is calculated only against the pay of workers in the city itself. Even so, the city controller’s office has estimated the tax could bring in anywhere from $60 million to $140 million annually, with the funds targeted for city mental health services.
A handful of bills have also been introduced in the states over the last two years, including measures in Massachusetts, Illinois, Minnesota, Washington, Rhode Island, Connecticut and California. A few are pending and won’t be taken up until next year, but most have failed.
Two measures are alive in Washington, both authored by Rep. Beth Doglio (D). One, HB 1681, would impose a surcharge equal to 10 percent of a company’s business and occupation (B&O) tax payments if its CEO’s pay is at least 50 times greater than its median employee wage. Under a second bill, HB 1778, the surcharge would increase to 25 percent if the executive pay ratio is equal to or greater than 150 to 1. Companies required to report their pay ratio to the SEC that don’t also send that information to the state would be hit with an automatic 25 percent surcharge.
Both measures are currently pending in the House Committee on Finance and are likely to be heard next session.
The Massachusetts bill, SB 1702, would hit companies that exceed the 100/1 ratio with an additional 2 percent tax on their net income. That measure, authored by Sen. Jason Lewis (D), is currently awaiting a hearing in the Joint Committee on Finance.
The California measure - SB 37, authored by Sen. Nancy Skinner, a Bay Area Democrat - would raise the annual state income tax on the top 0.2 percent of companies that do business in California from 8.84 percent to 10.84 percent. The rate would climb progressively higher for companies with CEO/worker pay ratios of higher than 100/1. The highest rate, 14.854 percent, would be imposed on companies where the ratio is 300/1 or higher.
That bill has been lodged in the Senate Rules Committee since April. It has until Jan. 31, 2020 to be heard, but some observers believe the bill will instead end up being forged into a ballot measure for 2020. If so, it could be paired with an already-qualified measure to overhaul the state’s longstanding property tax law (Prop 13), sure to be one of the most hard fought ballot measure battles in the nation.
With all of those measures seemingly in flux, advocates for taxing companies with large CEO/worker pay disparities have turned their attention to local efforts like those in Portland and San Francisco. Sarah Anderson, who directs the Global Economy Project at the Institute for Policy Studies, believes the San Francisco measure could convince other municipalities to pursue similar measures.
“I think it will have a huge impact,” Anderson says. “It will get a lot more attention as a ballot measure than it would have as just a straight vote by the Board of Supervisors.”
That’s key, she says, for gaining traction on an issue that is often too wonky for many people to keep up with.
“The number one reason I think this hasn’t caught on like wildfire in the way I thought it would a few years ago, is that people just didn’t know about this idea,” she says. “There are still mainstream journalists at big-time publications that aren’t even aware that companies have to publicly share this information.”
And now that Portland is deriving real revenue from its tax, she believes support is likely to grow at the grassroots level in many other locales.
“I talk to so many people now who, when they hear about tying taxation to the pay ratio, think it’s a great idea,” she says.
But as with most complex issues, the devil may truly be in the details.
University of California Berkeley Economics professor Benjamin Hermalin is far less bullish than Anderson on whether any such taxation plan will actually motivate companies to cut CEO salaries or foster greater wage equity. He thinks many companies will simply find ways around the law, such as moving operations outside of a city like San Francisco. Others might just choose to pay the tax as a cost of doing business, which produces revenue but does nothing to address the actual disparity problem. It could also lead to more efforts at the state level to bar local governments from implementing those taxes.
But more than anything, he says, if the goal is to lessen economic inequality, the approach is more punitive than practical in terms or positively impacting the widest number of people.
“Even if you heavily regulate a handful of CEOs, it’s only a fraction of the income inequality issue,” he says. “You would be much better off to change the tax code overall with a much more progressive income tax.”
-- By RICH EHISEN
By—SNCJ Managing Editor Rich Ehisen
Bird’s Eye View
Handful of States Consider Taxing Disproportionate CEO Pay
Lawmakers in at least three states have introduced legislation this year that would impose a tax on corporations that pay their chief executive officers far more than their average workers, according to Inequality.org, a project of the Washington, D.C.-based Institute for Policy Studies. Four states failed to pass high-CEO-to-worker-pay-ratio tax measures in 2017, after Portland, Oregon became the first city to adopt such a tax in 2016. San Francisco’s City Council has also approved a motion to place a CEO-pay tax measure on the city’s March 2020 ballot.