The Corporate Wage-Equity Act

I found this idea interesting (the act itself follows the short summary below, and is then followed by a detailed explanation of the reasoning and potential problems)…

 

Summary of The Corporate Wage-Equity Act

This bill establishes the “wage-equity corporation” or “WE corporation,” for which the salary paid to any employee is limited to twenty times the earnings of the lowest-paid employee. To encourage the adoption of this corporate structure it will be taxed at rates 40% lower than those paid by regular public corporations. All public corporations will become WE corporations by default if shareholders do not vote otherwise.

======
 

An Act to Establish a New Type of Corporation
for the Benefit of Employees and Society

 

Sponsored by ________________________________________________

 

Whereas corporate executives are paid historically high salaries in relation to other employees, which contributes to a destabilizing level of income inequality that’s bad for society and the economy;

Be It Hereby Enacted by the House of Representatives and Senate in Congress Assembled:

Section 1: SHORT TITLE

This Act may be cited as “The Corporate Wage-Equity Act.”

Section 2. DEFINITIONS

(1) For the purpose of this bill “public corporation” is defined as a company that has shares trading on any stock exchange.

(2) For the purpose of this bill “salary” is defined as the cash or market value of all forms of compensation at the time of payment.

(3) For the purpose of this bill “fiscal year” is defined as the annual period used by a company for accounting and tax purposes.

Section 3. CREATION OF A NEW TYPE OF CORPORATION

(1) This act recognizes the “wage-equity corporation” also referred to as a “WE corporation” as a new corporate structure.

(2) A WE corporation may not pay any employee more in a fiscal year than 20 times the earnings of its lowest-paid regular employee during that fiscal year, or 2,080 times the lowest hourly wage earned by any part-time employee, whichever is less.

(3) By default, all public corporations will be recognized as WE corporations at the start of each fiscal year unless shareholders representing 51% of all voting shares specifically vote to retain another corporate structure in the 12 months prior to the start of that year.

(4) WE corporations will be taxed at rates 40% lower than the rates paid by public corporations that have not adopted this legal structure.

(5) The U.S. Department of Labor will ensure compliance with the law, and will have authority to assess fines and/or require WE corporations to compensate employees when it determines the law has been violated, and/or to require repayment of excessive salary.

(6) Proxy voting of shares of all public corporations is hereafter illegal unless the party casting the vote(s) has written permission from the owner of the shares voted.

(7) In all other respects WE corporations will be treated by law and by regulatory authorities in the same way as current public corporations.

(8) This bill will take effect 90 days after passage.

=====

 

Explanation of the Corporate Wage-Equity Act

The bill is based on the premise that wage and income income inequality, when too extreme, are not just bad for low-paid workers, but also for society and the economy as a whole.

In 1965 CEO pay at America’s largest companies was 20 times that of a typical employee. By 1978 the ratio was 30-to-1, by 1995 it was 123-to-1, and the most recent calculations put CEO pay at 271 times the median wage of corporate employees. (1)

Apart from any injustice in this increasing pay-gap, there are also serious questions about its negative effects on employees, shareholders, and the economy as a whole.

Evidence show that wages have grown much more slowly than productivity for decades. For example, the Economic Policy Institute (EPI) notes that between 1973 and 2014 productivity grew by 72.2 percent while median wages grew just 8.7 percent during the same period.

EPI also notes that “pay for the vast majority likely has nothing to do with any stagnation in the typical worker’s individual productivity.” (2)

In other words, employees and the economy are more productive, yet market forces are not boosting wages accordingly.

This bill provides a way to begin to remedy that, and in a fairly straight-forward way. For example, if a top executive of a WE corporation wants an annual salary of $1 million, she must find a way for all employees to earn $50,000 or more (or $25 per hour as part-time employees).

In general, if corporate officers want higher pay, they must find a way to pay lower-level employees a higher wage.

Higher median wages are beneficial to society in various ways. For example, they may reduce rates of burglary and robbery, which have been positively correlated with higher income inequality. (3)

The data also shows that increases in income improve mental and physical health. (4)

Finally, the economy of the country as a whole suffers when there is too much income inequality. A recent study sponsored by the International Monetary Fund (IMF) found this:

“Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.” (5)

In other words, “trickle up” economics works better than “trickle down” theories. Or, to put it other terms, even the owners of capital benefit when workers can afford to buy what they sell.

Extreme income inequality is probably not good for societal stability either, but while we wait for more evidence to prove that argument, the evidence is already here as to the effects on those at the bottom and on the economy as a whole.

Objections, Questions, and Further Explanations

Why 20-to-1 or 2,080-to-1?

The ratio mandated by this act is based on the ratio between CEO and median employee pay in 1965, because at that time the low ratio didn’t seem to cause any economic problems or problems with the recruiting of qualified corporate officers. This law goes a bit further since it mandates a 20-to-1 ratio based on the income of the lowest-paid employee rather than the median wage.

The alternative maximum of 2,080 times the hourly wage of part-time employees avoids a loophole. If the law was based only on full-time employees, corporate officers could raise regular wages to boost their own salaries, then staff with mostly part-time employees at a much lower rate. With the dual ratios even part-timers will benefit from the law.

Will WE corporations simply outsource more work to pay low wages indirectly?

It’s likely some corporations will use independent contractors or temporary workers from labor service companies as a way to shift the lowest-paid work off the corporation payroll, so top-level salaries would be based on the higher wages of employees that remain on payroll.

Hiring people as independent contractors is already done by companies for various reasons, but its usefulness as a loophole is limited by IRS rules which determine when a person is actually an employee.

If the largest labor providers, like Kelly Services and Manpower, are used, they may themselves be WE corporations, so their employees will presumably be paid a decent wage. If this is not the case, this could prove to be a serious loophole which would have to be addressed by future legislation.

Are companies forced to make this change?

This law gives shareholders the option of keeping their corporation organized as it is, but also provides strong incentives to make the change.

Will the incentives be enough to motivate change?

Dropping the tax rate from the current 35% to 21% frees up money that could be paid out as dividend increases for shareholders of some companies, or reinvested. That’s likely to motivate many shareholders toward the change.

That’s the obvious incentive, but the law also give shareholders the ability limit executive pay, and so potentially increase profits in that way. Board members currently have a personal interest in increasing each others’ pay and shareholders are more numerous and unorganized than ever, thanks to investment through mutual funds and under-supervised retirement accounts. This situation has contributed to ever-higher salaries at the top, which this bill begins to correct.

Finally, conversion to a WE corporation happens automatically unless shareholders representing 51% of the outstanding shares vote otherwise. In other words, the burden is on the those who oppose the change to convince enough shareholders to vote their way.

Section 3(2) is important in this respect, because it stops the current practice of mutual fund mangers and other investment managers gaining control of the votes of small-shareholders by default. Explicit written permission must be given to vote on behalf of any shareholder. Without that permission many shares may not be voted, making it more difficult to prevent the change to a WE corporation.

Will corporations still get good management?

The argument that lower pay hinders efforts to get qualified management is a reasonable objection. Time will tell, but if this is a big enough problem shareholders are likely to vote for a return to the former arrangement.

A CEO could still make many millions of dollars. She would simply have to be paid partly in stock or options (valued at market when paid) and run the company well so the stock price rises. This might motivate applicants who are confident in their ability to run the company well, as opposed to those who are just confident they can get a large salary regardless of performance.

Will our government’s corporate tax revenue drop under this law?

Corporate tax revenue is likely to drop, but total tax revenue isn’t likely to decline much, if at all. The lower tax rate for WE corporations will be offset by several factors, including these:

1. Taxes on any increase in profits.
2. Taxes on wage increases of workers.
3. Taxes on potential increases in dividend payouts made possible by lower corporate taxes

Currently only 9% of Federal Government revenue comes from corporate taxes. (6) Since the law affects only public corporations and not all would become WE corporations, and there would be some offsetting revenue, the tax issue is unlikely to be a problem.

Does this bill try to stop people from becoming rich?

Corporate officers are employees, managers, but not necessarily creators of companies. Everyone would still be free to reap the rewards of starting a business and building it up. Furthermore, a CEO could still become rich if she does a good job, because she could be paid in stock or options, which, while valued at the market at the time received, could be worth much more if the corporation does well and the stock price rises. Of course, any employee can also choose to invest part of his or her wages in the company stock as well, and reap the benefits or suffer the losses.

Isn’t this too much meddling in the market?

Privately held companies are left alone by this law. Public corporations are different. They’re given special benefits like limited liability for owners. They also provide a way for founders to cash in for maximum value by “going public.”

But most importantly they’re legal structures created by law to benefit society. As such they’re subject to legislated changes that benefit society.

Why not make all public corporations WE corporations?

Like all new laws, this is experimental, so it makes sense to proceed with caution. Perhaps there will be unforeseen problems with this corporate structure. If not, or if those problems can be addressed in future legislation, then it could make sense to make the change to WE corporations universal.

Notes and Sources:

1. http://www.epi.org/publication/ceo-pay-remains-high-relative-to-the-pay-of-typical-workers-and-high-wage-earners/
2. http://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/
3. http://www.sciencedirect.com/science/article/pii/S0165176508001110
4. http://www.sciencedirect.com/science/article/pii/0167629695000321
5. https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf
6. https://www.cbpp.org/research/federal-tax/policy-basics-where-do-federal-tax-revenues-come-from