Rein in Runaway CEO Pay
Support HR3876 Income Equity Act of 2007
Legislation to limit the deductibility of excessive CEO pay to 25 times the pay of the lowest paid worker in a firm.
The runaway CEO pay problem
CEOs of major U.S. companies today make more in a day than their average employees make in a year. Last year, CEOs made an average of $10.8 million in total compensation, including stock options grants, according to an Associated Press survey of 386 Fortune 500 companies. That’s more than 364 times the pay of an average worker and 885 times the annual income of a full-time minimum wage earner.
In the last three decades, there has been an explosion in the gap between the compensation of top CEOs and their employees. In 1980, the ratio between highest paid and average compensation in a Fortune 500 company was 42 to one. By 2000, it has risen to over 500 to one. In 2007, the ratio was 411 to one.
CEO pay matters
A growing body of research points to the fact that runaway CEO pay undermines company performance and shifts profits away from employees and shareholders to management. Bloated CEO pay rewards a focus on short-term gains over longer-term growth. Many investment analysts view excessive pay as a warning signal of an accountability breakdown between board and management –and a symptom of an overly cozy board and compensation committee.
Doesn’t CEO pay reflect corporate performance?
A 2006 Corporate Library study found that high increases in compensation did not reflect significant long-term improvements in company performance. One of the most outrageous examples was Edward Whitacre, CEO of AT&T, who made $34 million over the years 2004 and 2005, despite a 40-point drop in his company’s stock from 2001-2005. A July 2005 Moody’s study suggested that firms that paid excessive compensation could actually face higher credit risks. The investor service found that firms which had large unexplained bonuses and option grants during the period 1993-2003 experienced dramatically higher default and downgrade rates.
Should government establish ceilings for executive pay?
The Income Equity Act does not set a ceiling or dictate what proper compensation practices should be. Under the current tax system, however, the more corporations overpay their executives, the less they pay in taxes. Taxpayers subsidize excessive CEO compensation by allowing bloated paychecks to be a fully deductible “business expense.” These deductions effectively shift the tax burden onto average Americans.
By capping the amount of the deduction to a ratio with lowest paid workers, we create incentives in the tax code for reducing pay disparities.
Potential Revenue from Income Equity Act
There remain no meaningful limits on how much corporations can deduct from their income taxes for executive compensation. If companies were required to pay taxes on amounts above 25 times what the lowest-paid worker in their company earns, it could generate significant revenue. If such a cap had been applied to the CEOs of just the 386 companies included in the Associated Press survey, it could have generated tax revenues of as much as $1.4 billion in 2006.
What does the Income Equity Act do?
HR 3876 Income Equity Act of 2007 amends the Internal Revenue Code to deny corporations a tax deduction for payments of excessive compensation to any employee that exceed 25 times the lowest compensation paid to another employee. The law also requires corporations to file a report on compensation to the Secretary of Treasury, establishing a uniform reporting requirement on the ratio between top and bottom compensation.
If the Income Equity Act were in effect, U.S. companies with employees who earn the minimum wage could still pay their top executive $304,200 and deduct the full amount from their corporate income taxes. A company whose lowest-paid workers made the average of $29,544 could pay their CEO $738,000 and deduct the full amount from their taxes. Those companies that wished to pay their CEOs above these levels could either keep their full tax deduction by raising the pay of their lowest-paid workers or simply pay taxes on any amounts above 25 times the lowest-paid worker’s pay.
Introduced by Rep. Barbara Lee (CA-9). Co-sponsors include: Rep. Neil Abercrombie (D-HI-1), Rep. Keith Ellison (MN-5). Rep. Bob Filner (CA-51), Rep Raul M. Grijalva (AZ-7); Rep. Zoe Lofgren (CA-16); Rep. George Miller, CA-7); Rep Pete Forney Stark (CA-13), Rep. Lynn C. Woolsey (CA-6).
The complete text of the legislation is Click HERE
For additional information on CEO pay, see: “CEO Pay Reform: A Point/Counterpoint,” prepared by the Institute for Policy Studies and the Center for Corporate Policy
http://www.corporatepolicy.org/pdf/CEO_Pay_Point_Counterpoint.pdf
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April 16th, 2010 at 7:39 pm
[...] company than the guy flipping burgers. So you believe that a CEO is worth 500 to one employee? http://extremeinequality.org/?p=14 I personally think that a CEO pay of 75-100 employees to one is MORE than enough compensation for [...]
May 8th, 2010 at 3:49 pm
[...] of society in which the means of production are owned and controlled by the state. There must be an awful-lot of CEOs who still haven’t heard they’re property-free….and, that their stockholders don’t really own the [...]