Editor’s note: We endeavor to bring you the top voices on current events representing a range of perspectives. Below is a column arguing that CEOs shouldn’t be making exorbitant salaries while their workers go without and that more stringent tax policies can help alleviate that inequality. You can read a counterpoint here, where Tho Bishop, an Assistant Editor for the Mises Institute’s Mises Wire, argues that restrictions on CEO pay is wrong and won’t fix any of the underlying causes of the pay gap between executives and employees.
Over the past decade, we’ve all heard about CEOs being paid exorbitant salaries while their workers struggle to make ends meet. Corporations have gotten government bailouts and used them to pay executive bonuses while they laid off laborers and middle management.
In fact, when the financial crisis was in full swing in 2008, banks used $1.6 billion of bailout funds to pay executive salaries, bonuses, and other benefits. The average CEO at a top 350 firm earned $14 million (including realized stock options). CEO salaries have grown by 940% since 1978 while the average worker’s salary has grown by 12%. A Stanford Business survey found that Americans think CEOs are overpaid and actually underestimated what CEOs earn by 90%. CEO compensation relative to that of the average worker does on some level illustrate the economic inequality we have in our country.
Firstly, let me state that I am not completely against high compensation for CEOs of publicly owned companies, especially with stock. They should be paid based upon the performance of the company, rather than fixed high end salaries or arbitrary bonuses. During the financial crash, AIG received $69 billion in TARP funds and an additional $112 billion in bailout money from taxpayers. Somehow they still found a way to pay out $1.5 billion in bonuses and rewards to executives.
Salaries are also driven by the market. While CEOs don’t necessarily have specialized skills like a computer programmer, somehow it’s been decided that they deserve a lot of money.
However, high executive salaries don’t lead to more efficiently run businesses. According to Forbes, “at the 50 publicly traded companies with the widest pay gaps” it would take workers 1000 years at their current salaries to reach the compensation of their CEO’s one year take home. This imbalance leads to lower morale among rank and file workers which results in lower productivity. A Harvard study found that companies with “high unexplained corporate pay ratio” saw their performance fall by “as much as half.” Lowered productivity hurts society as a whole.
I don’t think the government should directly intervene by capping salaries, but they should create fairness through taxation. As California attempted to do with SB37, corporate tax rates should increase based upon the ratio of CEO to worker compensation. The bigger the disparity, the more a corporation should be taxed. While some may see that as some form of socialism, it is not that simple.
If companies are not providing their workers with fair compensation and benefits, taxpayers pick up the slack by paying for entitlements. For example, the CEO of McDonald’s made $18 million in 2019, which was 1,939 times as much as the average McDonald’s worker. Along with Walmart, McDonald’s is one of the corporations with the most employees receiving entitlements like SNAP and Medicaid. 2% of all SNAP recipients in Arkansas were McDonald’s employees. Another 3.1% worked at Walmart. The average taxpayer should not be fitting a big chunk of the bill for their exploited neighbor’s health care, especially when so many middle class economic lives have been interrupted during the pandemic and people are sicker.
We also need to increase the marginal tax rate for high earners including dividends. If companies like McDonald’s don’t want to pay for their employees’ health care coverage and food on the frontend, their top level employees should have to pay a larger portion of their income to fund the expansion of government programs. We also need to increase the capital gains tax. Economists believe we could raise the capital gains tax rate from 19% to as high as 40% without disrupting investment. Researchers at Princeton found that increasing the capital gains tax rate just 5 points could produce up to $20 Billion more annually in federal tax revenue.
I’ve heard many people say “taxation is theft.” If so, then paying your employees an unlivable wage without benefits while high level executives make a mint is indentured servitude.
Jason Nichols is a lecturer in African American Studies at the University of Maryland and a prolific progressive commentator.