Money Opinion Opinion: We need to address excessive CEO pay By Zach Gheen Posted on April 13, 2016 11 min read 0 0 401 Feel free to use this image, just link to www.SeniorLiving.Org Photo courtesy of Ken Teegardin Debates over economic issues have seemingly dominated the political landscape in the United States. Within this debate, oftentimes the conversation focuses on the issue of economic inequality. On one hand, you have people such as businessman Donald Trump who believe that workers are already paid too high to be competitive on a global stage. On the other hand, you have people such as former Secretary of State Hillary Clinton and Vermont Sen. Bernie Sanders who have plans to raise the minimum wage to $12 and $15 an hour, respectively. An argument we often hear in opposition to higher wages is that low wage employment was never meant to be a source of sustainable income. However, this statement does not hold up to a historical analysis. The first attempt to implement a federal minimum wage came in 1933 with the National Industrial Recovery Act, a part of President Franklin D. Roosevelt’s New Deal. In response to Congress passing the act, FDR released a statement in which he declared: “It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country. By ‘business’ I mean the whole of commerce as well as the whole of industry; by workers I mean all workers, the white collar class as well as the men in overalls; and by living wages I mean more than a bare subsistence level—I mean the wages of decent living.” To me, it seems fairly evident that from the beginning, minimum wage legislation sought to establish a basic standard of living for the American people. At the very least, a working individual should have access to the basics. Another common argument heard in opposition to higher wages is that they would place an unsustainable burden on companies. However, the fact of the matter is that those in charge of those companies have seen their wages skyrocket in comparison to their workers. A 2015 report released by the Economic Policy Institute shows that the average American CEO pay is around 300 times that of their average worker. That’s not their lowest paid worker, but their average worker. To give this a historical perspective, in 1965, the average American CEO pay was around 20 times that of their average worker. To put the 300:1 ratio into perspective, the average CEO makes around $16.3 million, while their typical worker makes around $53,000. I want to reiterate that this typical worker is not a minimum wage employee. Let’s imagine that the CEO-to-worker pay ratio remained at the same proportion that it was in 1965, when our middle class was much stronger, when we had the 20:1 ratio rather than the 300:1 ratio we have today. If we keep the CEO pay constant at $16.3 million a year and pay the typical worker according to the 1965 ratio, your typical worker goes from making $54,000 a year to $815,000 a year. I don’t believe you need any type of economic knowledge to know that that would just simply not work. Now, let’s see what happens when you keep the average worker pay constant, and adjust the average CEO pay according to the 1965 ratio. With your typical worker making $54,000 a year, your average CEO would go from making around $16.3 a year to around $1 million a year. If wage increases are such a business killer, then why have these CEOs seen their pay raise substantially? One might say that the reason the average CEO pay has increased at such a rate is because the average American company is much more valuable than it was in 1965. In his book titled Saving Capitalism: For the Many Not the Few, former Secretary of Labor under the Clinton administration Robert Reich states, “Even had a CEO locked himself in his office and played online solitaire for these three decades, his company would still have become far more valuable.” What Reich means is that CEO performance does not always account for the variability in a company’s performance and worth. Oftentimes, overall market forces outside of the CEO’s control play just as much—if not more—of a role in determining what a company is worth. Many people would argue that going back to the precedent set in 1965 would be an example of punishing someone for their success. I don’t believe so. Rather, we would be going back to a system which has been proven much more egalitarian than the one currently in place. By going back to the 1965 CEO-to-worker pay ratio of 20:1, we would be able to begin on a path that would help secure economic equality. Rather than huge amounts of money going to those at the head of companies, more money can be funneled into things such as research and development, scholarship opportunities, sustainability measures and other socially responsible ventures. In order to accomplish this huge distribution of wealth, I would argue for an incremental change to our tax code. First, we should require that each company determine what each of its respective CEO-to-worker pay ratios are. If its ratio exceeds 300:1, we implement a punitive corporate tax. For the sake of this example, say we increase the tax rate by an additional 10 percent. Hopefully, this tax increase will be enough to give CEOs no other choice but to decrease their CEO-to-worker pay ratio below the 300:1 mark. After a few years of this, we then require companies to meet a lower ratio, say 250:1, with the same penalty in place as before. Gradually, we decrease the huge pay gap until we reach a point where it is no longer such a societal threat. Hopefully, after several years, we can reach a 20:1 ratio again and reinvigorate our middle class. Of course, a plan such as this would be met with accusations of class warfare. Again, I would argue that a return to the more sustainable economic picture of earlier decades is a return to a better society. Through this process, perhaps the playing field can be leveled out.