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Overcompensation: Tying Corporate Taxes to CEO Pay

Stephen Silberstein

Stephen Silberstein

One 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. [cont’d.]

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Overcompensation: Tying Corporate Taxes to CEO Pay

Stephen Silberstein

Stephen Silberstein

One 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.

Mark DeSaulnier

Mark DeSaulnier

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 notesthat 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.

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