If California companies want to keep paying their CEO’s a hundred times better than their workers, they could face higher tax rates. A bill to impose higher tax rates on companies with excessively high CEO-to-worker pay ratios passed its first legislative hurdle on Thursday, advancing out of a state Senate committee on a 5–2 vote.
If SB1372 were to become law, which its authors told the Associated Press is unlikely, the state’s current flat-rate corporate income tax would be replaced by a sliding scale. Most companies would pay an income tax rate ranging from 7 percent to 13 percent depending on the ratio between their top executive’s earnings and what their median employee earned in the same year. Financial companies would face a scale from 9 percent to 15 percent.
The high end of those scales would only affect firms that pay their top executives 400 times better than their median employee. The current fixed rates of 10.84 percent for financial firms and 8.84 percent for others would disappear, meaning companies with CEO-to-worker pay ratios below 100 would see a tax cut from the measure. It’s not clear how how many companies would see a tax cut and how many would pay more in California, but nationwide, the ratio between CEO and worker pay has skyrocketed over the past few decades, hitting 273-to-1 in 2012. That data relies upon average pay rather than the median figures that California’s law uses.
The bill’s passage out of committee comes alongside slow-but-ongoing federal efforts to bring transparency and accountability to corporate CEO pay nationwide. A Securities and Exchange Commission rule requiring publicly-owned companies to disclose their pay ratios was finally approved in the fall, but it leaves companies substantial wiggle room in how they calculate the median worker’s compensation. The rule requires only disclosure and features no monetary incentive or penalty to curb pay ratios.
The rapid divergence between executive pay and worker pay might not rankle the public if exorbitant compensation at the top of companies were closely tied to economic performance. But the corporate boards that set executive pay are ineffective at drawing that connection. So-called “performance pay” rules are routinely gamed or ignored, and executives are effectively guaranteed to see their incentive payments regardless of the company’s performance.
Over the same period that the connection between performance and pay has broken down at the top, workers at the bottom have been providing higher and higher productivity levels without seeing a commensurate rise in pay.