IPS POLICY BRIEF Policy Brief

Washington, D.C. February 2019

(updated)

The CEO-Worker Pay Gap U.S. corporations are reporting ratio data for the first time ever.

NEW FEDERAL CEO-WORKER PAY RATIO WHY THE PAY RATIO INDICATOR MATTERS DISCLOSURE REGULATION NOW IN EFFECT ►Corporate pay gaps help drive America’s After years of corporate resistance, Americans extreme inequality. now have an opportunity to see how much Worker in the United States have more top executives make than the workers largely stagnated since the 1970s. But the top 1 their own companies employ. percent of U.S. income earners have more The 2010 Dodd-Frank financial reform than doubled their share of the nation’s Congress required publicly traded U.S. income over the same span. Corporate corporations to annually report the ratio executives head about two-thirds of between their CEO and median worker America’s top 1 percent households. As of compensation. Corporate lobby groups and 2016, the ratio between S&P 500 CEO and allied Republicans fought hard to repeal or average U.S. worker pay stood at 347 to 1, water down this mandate. over eight times as wide as the gap in 1980. But institutional investors weighed in heavily Bloomberg data from 22 major countries active in global markets reveal that CEO pay to defend ratio disclosure reform, as did over in the United States now quadruples average 280,000 individual Americans outraged about chief executive compensation in America’s the extreme pay gaps that large U.S. peer nations. No nation has a gap between corporations on average display. These gaps average CEO and worker pay anywhere near have the vast majority of Americans deeply as large as the divide in the United States. concerned about executive pay excess. A 2016 ►Wide pay gaps are bad for business. Stanford University poll found that 74 percent Academic research indicates that extreme of Americans see CEOs as overpaid relative to gaps undermine worker morale. Lower their workers. morale, in turn, reduces productivity and

10 Largest CEO-Worker Pay Gaps, 2017 Median Worker Pay Company CEO Pay Pay Ratio (global) Weight Watchers $33,372,283 $6,013 5,908:1 Mattel $31,275,289 $6,271 4,987:1 Abercrombie & Fitch $10,262,749 $2,991 3,431:1 McDonald's $21,761,052 $7,017 3,101:1 Gap $15,587,186 $5,375 2,900:1 Live Nation $70,615,760 $24,406 2,893:1 Yum China Holdings $9,571,017 $3,396 2,818:1 Aptiv PLC $13,800,347 $5,464 2,526:1 ManpowerGroup $11,987,873 $4,828 2,483:1 UniversalSource: AFL -CIO Paywatch. $3,711,199 $1,528 2,429:1 Source: AFL-CIO Paywatch.

IPS POLICY BRIEF

increases . A Glassdoor analysis of former top executives made up 87 of these top data from 1.2 million employed individuals 100 donors. suggests a statistical link between high CEO BUILDING ON PAY RATIO DISCLOSURE pay and low CEO approval ratings among employees. Peter Drucker, widely known as Policymakers should ensure that taxpayers the father of modern management science, are not subsidizing extreme CEO-worker pay believed that the ratio of pay between worker gaps in any way, whether through tax, and executive can run no higher than 20-to-1 contracting, or subsidy policies. The new pay without inflicting damage on a corporation’s ratio data make it much easier to implement internal dynamics. policies that leverage the power of the public purse to narrow these dangerous divides. In 2017, the new Trump administration acting SEC chief re-opened public comment on pay The following reform proposals could be ratio disclosure, a move widely seen as a implemented at the federal level and in many White House maneuver to derail this states and cities. None of these proposals transparency reform. But the move backfired. would dictate exactly how much companies Numerous institutional investors submitted can pay their top executives. But all would letters underscoring the importance of the provide an incentive for corporations to both disclosure mandate. reduce executive pay and lift up compensation for workers at the bottom end Among these investors: state treasurers from of corporate . four states, 100 investors representing $3 ►Ratio-linked business tax rates trillion in assets under management, CALSTRS, the Network for Sustainable U.S. corporations received a massive windfall Financial Markets, the Religious Society of from the 2017 Republican tax reform, which Friends, SharePower Responsible Investing, slashed the corporate tax rate from 35 to 21 Inc., Trillium Asset Management, the US percent while maintaining many of the most Social Investment Forum, and Walden Asset egregious business tax loopholes. Lawmakers Management. at the state, local, and federal levels seeking to ►Runaway CEO pay endangers democracy recoup some of these windfalls should and the broader economy. consider excessive pay gap taxes. The reckless “bonus culture” of the early 21st In 2018, Portland became the first locality century, many observers believe, contributed anywhere to apply a tax penalty on publicly mightily to the 2008 financial crisis. traded companies with wide gaps between Outrageous levels of compensation give their executive and worker paychecks. The executives an incentive to behave Oregon city generated approximately $3.4 outrageously, to “cook the books” and engage million through this tax in its first year. in all sorts of other reckless risks. The Portland surtax sets a 2.2 percent levy on Current executive compensation patterns, adjusted business net income. The surtax observers agree, often leave long-term increases this business tax liability by 10 damage to company and country, everything percent for companies with CEO-worker pay from slashed payrolls and R&D budgets to an ratios of more than 100-to-1 and 25 percent for increasing oligarchic tilt to our democracy. In companies with ratios of more than 250-to-1. 2016, America’s top 100 donors to political In other words, a large company that owes the campaigns generated 14 percent of the city $100,000 for its business license tax and political contributions that came from the has a pay ratio of 175-to-1 would pay an nation’s 250 million adults. Current and additional $10,000 in surtax.

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IPS POLICY BRIEF

Portland city officials have identified more not subsidize companies that increase than 500 corporations that do enough economic inequality either. business in the city to be affected by the ►A ratio approach to corporate welfare surtax. Many of these 500 companies regularly appear on lists of America’s highest- All forms of federal, state, and local corporate paid CEOs, most notably Goldman Sachs, welfare could be required to incorporate pay Oracle, Honeywell, Wells Fargo, and GE. ratio guidelines in their qualification standards. In November 2015, then Legislators in seven other states — California, Republican congressman Mick Mulvaney Minnesota, Rhode Island, Connecticut, from South Carolina authored an amendment Illinois, Massachusetts, and Washington — designed to prevent the U.S. Export-Import have introduced similar tax legislation. Such Bank from subsidizing any U.S. company initiatives may now gain more traction as a with annual CEO pay over 100 times median result of the new federal tax code provisions worker pay. Mulvaney currently directs the enacted this past December. Office of Management and Budget. The In the last U.S. Congress, Rep. Mark amendment did not become law, but DeSaulnier introduced the CEO Mulvaney’s proposal suggests potential for Accountability and Responsibility Act (H.R. bipartisan action. 6242), which increases the corporate tax rate The European Union already applies such pay on firms that pay their CEO more than 100 ratio standards to state aid for failing banks. times the pay of their median employee. Bailed-out banks operating within the EU ►Ratio-linked procurement reform have to cap their executive pay at no more A Rhode Island Senate bill would give than 15 times the national average or preferential treatment in state contracting to 10 times the of the average worker at corporations that pay their CEOs no more the bank. than 25 times their median worker pay. The measure’s sponsors see this legislation as a sensible “good government” reform that would reduce taxpayer subsidies for top Authors: executives and encourage more efficient and effective pricing and services from companies Sarah Anderson and Sam Pizzigati, co- truly interested in serving the public. editors of Inequality.org, the Institute for Policy Studies online portal into all things In past congressional sessions, Rep. Jan related to the income and wealth gaps that Schakowsky has also introduced legislation so divide us, in the United States and throughout the world. that would extend tax breaks and federal contracting preferences to companies that Contact: [email protected], 202 787 5227 meet a variety of responsible behavior Pay ratio resources: benchmarks, including CEO-worker pay https://inequality.org/action/corporate-pay- ratios of 100-1 or less. equity/ Under existing law, the U.S. government Weekly inequality newsletter: denies contracts to companies that https://inequality.org/resources/inequality- discriminate by race and gender in their weekly/ practices. Our tax dollars, Twitter and Facebook: @inequalityorg Americans believe, should not subsidize racial or gender inequality. Our tax dollars should

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