Reimagining Government: Two States Address CEO Pay
by Scott Klinger, 5/6/2014
One of the rites of spring is the annual publication of CEO pay data. Soaring stock markets last year fattened executive pay checks to levels not seen since before the 2008 financial collapse. The average large company CEO took home $10.5 million last year, up 13 percent from 2012, according to an analysis published by USA Today. More remarkable was the fact that 15 executives realized pay of more than $100 million, led by Facebook’s Mark Zuckerberg, whose $2.3 billion in stock-based pay topped the charts.
In contrast, the median pay of American workers rose a meager 1.4 percent last year, to $40,872. That means the average CEO made 257 times the pay of the average worker.
Lawmakers in California and Rhode Island are considering legislation that would link the CEO-to-worker pay ratio to the taxes a company pays and to its ability to gain state government contracts.
In California, State Sen. Mark DeSaulnier (D-Concord) introduced legislation (S.B. 1372) that would replace the current 8.84 percent corporate income tax rate with a sliding scale ranging between seven percent and 13 percent, depending on the CEO-to-worker pay ratio. Publicly traded companies with CEO-to-worker pay ratios below 25-to-1 would pay the lower rate, while those with pay ratios higher than 400-to-1 would pay the higher rate. Forty-seven of the nation’s 250 largest companies would be subject to the highest rate, according to a Bloomberg analysis of government data. The bill would also penalize firms that ship more than 10 percent of their workforce offshore in a given year by raising their tax rate by 50 percent. The bill was recently reported out of the California Senate Governance and Finance Committee and is awaiting consideration by the Senate Appropriations Committee. Because the bill raises taxes, it requires passage by more than two-thirds of California legislators, a hurdle that will likely be difficult to achieve.
In Rhode Island, the State Senate will hold hearings on May 13 on a bill that would give preferential treatment in the awarding of state government contracts to firms with a ratio of highest-paid executive to lowest-paid employee of less than 32-to-1. The legislation, S. 2796, aims to reduce taxpayer subsidies of excessive executive compensation. Fourteen of Rhode Island’s 38 senators have co-sponsored the bill, including the Senate Majority Leader and the chairs of the Senate Finance and Judiciary Committees.
Both of these bills could become models for similar legislation in other states. An example of how this might work can be found in the successful efforts of the U.S. Public Interest Research Group (U.S. PIRG) to get states to introduce legislation that would close offshore tax loopholes in state tax codes to recapture more than a billion dollars of state revenue lost to tax havens every year. Montana led the way, passing this legislation in 2003, followed by Oregon in 2013 after a campaign by U.S. PIRG. Earlier this year, it passed both houses of the Maine legislature before being vetoed by the governor after a campaign led by Maine Peoples’ Alliance. Wisconsin and Massachusetts are still considering bills this legislative session.
Current Federal Law Fails to Control CEO Pay
The U.S. government tried and failed to use tax legislation to control CEO pay. In 1993, Congress proposed legislation that would limit the amount of executive compensation that could be deducted on tax returns to no more than $1 million per executive per year. But as the bill neared passage, a platinum-plated loophole was inserted allowing unlimited deductions for any pay deemed to be performance-based. As a result, stock-based pay replaced cash-based bonuses and other performance awards. CEO pay soared like never before. The performance pay loophole costs the U.S. Treasury $10 billion a year, enough to pay for extending emergency unemployment benefits for six months.
Can States Lead the Way?
These innovative state bills that would rely on CEO-to-worker pay ratios to determine corporate tax rates and access to government contracts envision a new approach to reining in soaring inequality, or at least to removing public subsidies from those companies whose pay practices contribute to the widening divide between the rich and everyone else.