What to Do About Excessive CEO Pay?

Harold Meyerson describes a proposed California law:

The bill now moving through the California Senate doesn’t compel CEOs and their corporate boards to either raise their employees’ wages or cut their own. It merely presents them with a choice. Those who overpay themselves and underpay their employees can continue to do so but thereby subject their company to higher taxes. Or they can diminish the discrepancy in compensation and thereby lower their company’s taxes.

The proposed legislation wouldn’t exactly plunge CEOs into poverty. It would reduce, on a sliding scale, California’s corporate taxes — currently set at 8.84 percent of net income — for any company paying its chief executive less than 100 times the pay of its median worker, and raise them, also on a sliding scale, for any company paying its CEO more. (Under the terms of the Dodd-Frank financial reform act, the Securities and Exchange Commission is required to publish the CEO-median worker pay ratio for every publicly listed company. The SEC is expected to begin this practice this year.)

Other than some technicalities I don’t know that I have an objection to California’s proposed law. I doubt it will do much. As is the case with current law it would only apply to income generated within California so it’s possible that some companies might stop doing business in California.

That might not even be necessary. Just to take one example, Apple (headquartered in Cupertino) wouldn’t even need to close its many California stores. It could just sell them to franchisees and sell its products to the distributors (or the franchisees themselves) in any state that doesn’t have such a tax.

Companies that couldn’t engage in such a subterfuge but that are cash-rich enough could buy back their stock and become private.

I also note that the Dodds-Frank provision doesn’t require the companies to include wholly-owned subsidiaries in their calculations. That would suggest another strategy: offshore more of your workforce which I presume would be thought of as an unintended adverse secondary effect.

I think the real issues at stake here are poor corporate governance and the slack labor market created by globalization. When executive compensation becomes unmoored from company performance (my impression is that’s a factor mostly but not exclusively in the financial sector), it means that the companies’ boards for whatever reason are not doing their jobs. And when a worker’s competition isn’t the guy who lives next door but somebody who lives in India it would be expected that would put downward pressure on wages.

The interesting thing is that it hasn’t put downward pressure on executive pay. I would think that large companies could hire a highly-experienced Indian CEO who’d be willing to work for a fraction of what his U. S. equivalent would. For some reason that never seems to happen.

I’d be interested in hearing others’ reactions to the proposed law.

8 comments… add one
  • PD Shaw

    I would think a state could only do this if a corporation’s principle place of business was in that state. Otherwise, a state is regulating wages earned in another state. Could California adopt a sliding corporate tax rate, depending on how many employees are paid California’s minimum wage? I can see why California might want to do so, it doesn’t want its high minimum wage to encourage business to move some jobs to Alabama.

  • PD Shaw

    I don’t have time to read the entire bill, but I found the first introductory phrase amusing:

    “With the exception of banks and financial corporations . . . “

  • That occurred to me as well, PD. It’s why I used Apple as an example. If that’s the case, the law would incentivize moving corporate headquarters to other states with whatever attendant loss of jobs that would entail also, presumably, an unintended adverse secondary effect.

    “With the exception of banks and financial corporations . . . “

    Heh. Re-writing other laws along similar lines would be amusing. When you eliminate the prime offenders, what are you left with?

  • Modulo Myself

    Who can tell how much it will do? I’m sure that there are enough loopholes to get around the law. And if the CEO’s pay goes down, I don’t see how it ends up in the pockets of the workers.

    It would not surprise me to find that corporate boards feel very trapped. They need to keep CEO pay up because they’re all in the same stratosphere. Suddenly paying an Indian 1/10th of the market rate would set off a chain reaction. In the end, for all we know, most of what happens in corporations called management could be done by interns and HR, which, at one point, will end up being done by robots.

    If you’re just vaguely super-rich, can you afford to have your income cut in half? How many people can afford to have their income cut in half or more? Lots of super-rich people are probably super-cheap and have their money filtered out over 3 generations, so in their minds, no, they can’t. There must be others who need every penny, so no, they can’t either.

  • It would not surprise me to find that corporate boards feel very trapped.

    Just as most people, however rich, think of themselves as middle class (which is Americanese for “middle income”). As your income rises, the bare necessities increase from an apartment with a few sticks of furniture, three squares, and a T-shirt and jeans step by step to a 10,000 sq. ft. mansion in the Hamptons (or Malibu as I was once corrected), bespoke suits from Savile Row, and regular dinners at Le Tour d’Argent, to which you’re flown in your personal jet.

  • Modulo Myself

    Just as most people, however rich, think of themselves as middle class (which is Americanese for “middle income”).

    What’s weird is that the period of increased equality in America was also the period when there was a really distinct and inclusive upper-class. The WASPs ran half of the government (and not very well) and were everywhere else in the literary and arts world. They were definitely not middle-class people. McGeorge Bundy or Ben Bradlee or Robert Lowell did not have the same exact concerns that a CEO of energy company making 100 million a year has.

  • As I’ve said before, I think that an egalitarian American society (to use Mickey Kaus’s phrase, one with substantial social equality) can tolerate a very small upper class if only because we’ve done it with reasonable success for a couple of hundred years. What I don’t think we can tolerate is a large group of rich rent-seekers who use their new-found wealth and status to ensure that their descendants retain their prerogatives.

  • ...

    As is the case with current law it would only apply to income generated within California so it’s possible that some companies might stop doing business in California.

    I’m envisioning big companies pulling a GE, where they’re immensely profitable overall, but have zero taxable income here in the USA. They’ve already had the practice. And there exist very expensive consulting firms to help companies set themselves and their subsidiaries up in such a fashion as to take maximum advantage of all kinds of tax laws, even relatively minor things like FUI and SUI.

    It’s all just a rigged game, so nothing will come of this save to potentially make some more lawyers, accountants and consultants a little richer. And provide more incentive for the very rich to give money to the political class to ensure all the correct loopholes get written. After all, those loopholes don’t write themselves!

    “With the exception of banks and financial corporations . . . “

    So it’s a comedy bill then….

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