We've Waited Too Long for Corporations to Fix the CEO Pay Problem on Their Own

A tax penalty on extreme pay gaps would give corporations an incentive to finally narrow these obscene divides. (Photo: Screenshot/Youtube)

We've Waited Too Long for Corporations to Fix the CEO Pay Problem on Their Own

A decade after bonus-chasing executives like Angelo Mozilo crashed the economy, we need tax incentives to push companies to narrow the gaps between CEO and worker pay.

I went on CNBC's Squawk Box this week to talk about a new proposal from Senator Bernie Sanders to put tax penalties on corporations with extreme gaps between their CEO and worker pay. This is an issue I've been working on for many years.

In fact, a dozen years ago, in August 2007, I had also appeared on Squawk Box to talk about solutions to our runaway CEO pay problem. Back then I was particularly critical of the massive payouts going to Wall Street executives like then-CEO of Countrywide Financial, Angelo Mozilo. Rising foreclosure rates on his company's sub-prime mortgages were already causing jitters. But when I questioned Mozilo's $43 million paycheck, the CNBC host and other guests nearly bit my head off.

"Mozilo built that company from nothing!" I remember one of them shouting into my earpiece. "His shareholders believe he walks on water!"

As we know now, Mozilo had built his massive fortune on nothing but a house of cards. Four months after this CNBC show, Countrywide didn't even exist.

Mozilo was just one of many bonus-chasing Wall Street executives whose recklessness drove the U.S. economy off a cliff. In the aftermath of that meltdown, I had hoped that big corporations and their shareholders would solve the broken executive pay system on their own. Why would anyone continue to tolerate a system that is all about short-term gains for those at the top -- regardless of the consequences for the rest of us?

But more than a decade later, the myths that propped up Angelo Mozilo remain prevalent.

Others on the CNBC show this week reiterated the widely debunked theory that the free market determines pay. Up and down the corporate ladder, they claimed, employees are paid what they're worth -- even if that results in vast pay divides, with CEOs making hundreds of times more than their employees.

I got a little impatient with this point of view, as you can see in the video excerpt posted by CNBC.

The discussion made me even more convinced that the time is now for public policy to rein in these persistently extreme CEO-worker pay gaps. Corporations will not change their practices on their own.

A new Institute for Policy Studies report I co-authored analyzes the potential impact of a federal tax penalty on companies with huge pay gaps, as Sanders and others have proposed. We applied graduated rates, from 1 percentage point on companies with CEO-median worker pay ratios over 100 to 1 to 5 percentage points on ratios above 500 to 1.

What we found is that if such taxes had been in place last year, S&P 500 corporations would have owed as much as $17.2 billion more in 2018 federal taxes. This is assuming that the companies didn't change the size of their gaps. Ideally, of course, they would respond to the tax by narrowing their gaps -- by lifting up the bottom or bringing down the top (or both).

We also looked at how much more certain companies with particularly large gaps would've owed the IRS if they didn't narrow their gaps.

  • Walmart, for example, with a pay gap of 1,076 to 1, would have owed as much as $794 million in extra federal taxes in 2018 with this penalty in place. With those millions, the federal government could have extended food stamp benefits to 520,997 people for an entire year.
  • Marathon Petroleum, with a 714-to-1 gap, would have owed an extra $228 million, more than enough to provide annual heating assistance for 126,000 low-income people.
  • CVS, a drug store chain with a 618-to-1 ratio, would have added a revenue stream that could have provided annual Medicare prescription benefits for 33,977 seniors.

A tax penalty on extreme pay gaps would give corporations an incentive to finally narrow these obscene divides. If they still refuse to do so, the tax will generate revenue that can be used for inequality-reducing public services and investments. We've waited too long for big corporations to do the right thing on their own.

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