Why Economic Justice Matters: This Machine Looks at Ratios (Part 3)

DSC02081The Ratio Solution

It’s quite obvious that as CEO pay has gone up, economic advantages have gone down. While we can say that correlation isn’t causation, in this case there’s a distinct cause. While CEO pay has increased, it’s come by cutting into the wages of workers. As pointed out already, this stagnating wages and lack of hope in progression is what’s fertilizing the ground for a growth in fascism. So how do we stop the growth of CEO pay without capping CEO pay?

The problem is ratio; the higher the ratio between Executive pay and Worker pay, the bigger the economic problem. In the 1960s the average CEO (who is typically the highest compensated employee) earned at a 20:1 ratio. That means that it took 20 worker salaries to equal the salary of the CEO. If the average worker earned $7,000 a year, the CEO would earn $140,000 a year. In the modern age, the average salary is about $46,000 (which still accounts for millionaires, yet is still relatively low), with the average CEO earning 200 times what his average worker receives ($9.2 million). Take that $9.2 million and break it down to a 20:1 ratio and the average worker would be paid $460,000 a year; not a shabby income.

Thus, if income inequality is the problem, the solution isn’t to cap CEO pay, but rather tie the company’s effective tax rate to the company’s income ratio. The question, of course, is how do we determine an acceptable income ratio? We want an income ratio that allows the top compensated employee to be a position of wealth, as this provides incentive, but we also want a ratio where the average worker makes a living that doesn’t require survival. Not to mention that the ratio impacts politics – if I earn at a 400:1 ratio to my employees, it would take 400 employees to match what I could donate to a candidate (which would require a lot of cooperation). Thus, the more wealth an individual has, the harder it is for people to gain a voice against his wealth. So whatever ratio we choose it has to not only provide a fair wage to workers and provide an incentive to get better, it also has to be low enough so that no one person obtains enough wealth to overpower the population.

From various views, a 20:1 ratio is the ideal ratio. It’s high enough to provide incentive to work harder, but low enough to prevent our economy from diving into a tailspin. Of course, political realities being what they are and with some differences in companies, we could create an ideal of 20:1 and a maximum of 100:1. Rather than capping CEO pay, the government would instead cap the ratio. Thus, if a CEO earns $10 million, more power to him, but his average worker better earn $100,000 (and the “average” would need to exclude executive pay from the equation).

The negative aspect of government regulation – of capping the ratio – would be on the upper end of 100:1. But I also believe in creating positive reinforcement for companies as it creates more economic freedom. That being said, I’d create the following tax bracket.

70:1 – 100:1: They would pay an effective tax rate of 40%. That means that after deductions, if their rate fell below 40% they’d be penalized until the rate reached 40%. Nothing they do, no moving around in the books, nothing could ever drop them below 40%.

50:1-69:1: They would pay an effective tax rate of 30%. They could take deductions, but could never drop below the 30% mark.

30:1-49:1 Their tax rate would drop to 20%. But notice that this is not an effective tax rate. In this instance, they could take deductions in order to reduce their tax rate, but never below 15% (the bottom effective tax rate).

20:1 – 29:1: This, being the ideal, would receive the best treatment. The maximum they’d pay in taxes would be 15% and there’d be no bottom in terms of their deductions. That is, if their deductions resulted in them paying 0% taxes, then so be it. The fact is, any company that fell in this range would be helping to create a powerful middle class, which would more than make up for any lost revenue from the business.

The only companies this would apply to would be any and all publicly traded companies and companies with 50 or more employees. Small businesses wouldn’t face this law. The reason is smaller businesses tend to have lower ratios by nature of their existence. Likewise, for start ups and other companies that do earn millions, but keep a small staff, the competition of bigger salaries from bigger companies would naturally keep the ratios low.

What’s great about this plan is that it literally costs corporations nothing. They don’t have to find a way to increase revenue (as they do with minimum wage), to increase their profits to make up for a loss, or to take a loss. The only thing it does is give back the wealth that the executives took (remember, executive pay jumped 725% from 1970 to 2015, while worker pay increased 5.6%, so this is a matter of giving economic justice and worker’s dues than it is redistributing unearned wealth). The company merely has to rework their payroll and benefits structure. Things such as stock options and profit sharing that add to the overall compensation of an executive would likewise have to be handed down to the workers until the total compensation of the highest earning employee (typically the CEO) matched the total compensation of the average worker.

In this scenario profits aren’t impacted, stock holders aren’t impacted, companies pay no extra money, and so on. All that happens is that executive pay is greatly reduced while worker pay is greatly increased, at least within a 20:1-100:1 range.

Of course, some might argue that production companies will just take their factories overseas or outsource their labor to overseas labor, that way executives can keep a high pay. They’ll just dump the workers. Here is where certain protections would need to be put into place. But again, those protections don’t have to be necessarily arbitrary, such as saying, “You can’t send your stuff overseas.” After all, globalization isn’t entirely bad and can help some struggling economies if handled correctly. How, then, do we handle it correctly?

We apply the same ratio rule to all overseas labor and, by extension, to all outsourced labor to foreign companies. That means if a technology company wants to outsource the production of their products to Foxconn, they’d have to ensure that the executives at Foxconn don’t earn greater than 100:1 compared to their workers. If a company wants to open an overseas factory, adjusting for inflation the same ratio rules would apply. A company could still send jobs overseas, but the advantage of using near-slave labor would disappear, which would protect multiple jobs in the US and possibly bring some jobs back.

The fact is, we have to do something and this is one possible option. It’s revolutionary, but that’s what we need in this moment. We need a revolution that seeks to change the system for the better by seeking a way to help all, not just a few. Of course, there is another possible way of revolutionizing the system in order to fix our economic woes.