Wall Street’s abusive, reckless, and at times criminal behavior caused the worst financial crisis and economic downturn since the Great Depression, throwing millions of Americans out of their homes and jobs. More than a decade later, excessive executive pay is still a problem on Wall Street and throughout corporate America. Big banks, private equity funds, and other big corporations offer massive payouts to their top executives, encouraging them to do whatever it takes to hit the short-term jackpot — regardless of the harmful impacts their reckless actions might have on workers and their communities.
While worker wages have largely stagnated since the 1970s, the top 1 percent have more than doubled their share of the nation’s income. Corporate and banking executives head about two-thirds of America’s top 1 percent households. The more corporations channel into executives’ pockets, the less they have for wages and other investments.
In the 1950s, CEOs made 20 times more than their median employees. Over the past two decades, the annual gap between CEO pay and typical worker pay has averaged about 350 to 1.
But this problem extends beyond the big banks. Of the 100 S&P 500 firms with the lowest median worker wages, 51 bent their own rules in 2020 to pump up executive paychecks.
Why should we begrudge CEOs their soaring pay packages? Because they are coming out of our pockets. First, the CEOs profit from us as customers — and not always honestly. Second, we subsidize their executives’ salaries with our tax dollars because bonuses are tax-deductible, third, compensation in the form of stock-based pay encourages CEOs to take excessive risks to boost share prices, risking a financial crisis and taxpayer bailout.
There are three promising measures we support to rein in executive pay on Wall Street: the first is legislation to end the tax subsidy corporations get from the rest of us when they pay sky-high bonuses, and the second is a provision from The Dodd-Frank Act that requires corporations to publicly-disclose the ratio between the salaries of their CEOs and their employees, and the third and newest is the “Tax Excessive CEO Pay Act, which raises the corporate tax rate on companies based on the size of the gap between the CEOs and the median worker pay.
Taxing Excessive CEO Pay
We need to address both excessive CEO compensation and the inequality that pay disparities both create and exacerbate in our economy. The bill raises the corporate tax rate on companies based on the size of the gap between the CEOs and the median worker pay. Under the bill, tax penalties would begin at 0.5 percentage points for companies that pay their top executives between 50 and 100 times more than their typical workers. Companies that pay top executives over 500 times worker pay would pay the highest penalty, at 5 percentage points. All private and publicly held U.S. corporations with average annual sales for the three preceding years of at least $100 million would be subject to the tax.
The bill raises the corporate tax rate on companies based on the size of the gap between the CEOs and the median worker pay.
Closing the Corporate Bonus Loophole
Current law sets a cap of $1 million on the amount that banks and other corporations are allowed to deduct for “performance based” compensation — per top executive — from the company’s taxable income. But the cap is only limited to a company’s CEO, CFO, and three other highest-paid employees. It does not extend to Wall Street traders, celebrities, and highly paid non-executives. As a result, banks and other corporations can deduct unlimited amounts from their taxable income for bonus compensation to these highly-paid individuals. Executive compensation experts have found that pay arrangements relying heavily on “performance pay” encourage managers to focus on boosting share prices in the short-term at the expense of long-term value. This tax loophole gives banks an incentive to perpetuate the reckless Wall Street bonus culture that was a key factor in the 2008 financial crisis.
The 2017 Trump-GOP tax law closed this “performance” pay loophole, but only for compensation going to the CEO, CFO, and the three other highest paid employees. The American Rescue Plan, passed in March 2021, expanded that list further, but only to the top 10 executives. As a result, performance pay above $1 million going to Wall Street traders, celebrities, and other highly paid employees remains fully deductible.
When big banks and large corporations don’t pay their fair share in taxes, small businesses and working families have to pick up the tab. Fully closing the CEO bonus loophole would not only end this obscene taxpayer subsidy for multimillion dollar bonuses, it would raise tens of billions of dollars in revenue that could go towards investments in health, education, and infrastructure.
This legislation introduced in the 115th Congress closes a loophole that allows corporations to deduct CEO salaries above 1 million dollars from their taxable-income.
SEC Pay Ratio Disclosure Rule
Ten years after the financial crisis, and eight years after the passage of the Dodd-Frank Wall Street reform law, 5 of 12 mandatory executive compensation rules remain to be approved by the Securities and Exchange Commission. But thanks to the efforts of financial reformers and allies against fierce corporate opposition, a major victory was won in 2018: the SEC finally released a rule to implement a provision of the Dodd-Frank Act requiring companies to disclose the ratio of their chief executive’s pay to that of their median employee. This is the first time in US history that publicly traded companies in the US are having to disclose their internal pay gaps. Disclosure provides an objective standard for measuring the reasonableness of a CEO’s pay, an important metric for investors and other stakeholders. This data is already helping efforts at the municipal and state government levels to link firms’ pay ratios to tax incentive structures that reward greater equity.
“Pandemic Pay Plunder: Low-Wage Workers Lost Hours, Jobs, and Lives. Their Employers Bent the Rules — To Pump up CEO Paychecks” by Sarah Anderson and Sam Pizzigati, May 11 2021
“How the CEO Worker Pay Gap Deepens Income and Wealth Inequality”, by Sarah Anderson, Institute for Policy Studies, March 17 2021
“CEO compensation surged 14% in 2019 to $21.3 million”, by Lawrence Mishel and Jori Kandra, Economic Policy Institute, August 18 2020
“A Hard-Won Victory on CEO Pay“, by Jim Lardner, Americans for Financial Reform, June 21, 2018.
“CEO Pay: Still Not Related to Performance”, by Dean Baker and Jessica Schieder, Center for Economic and Policy Research, June 2018.
“Portland Spurs Efforts to Rein In CEO-to-Worker Pay Gaps”, by Jacob Rund, Bloomberg News, June 1, 2018.
“10 years after the Great Recession, big banks are still making outrageous profits”, by Sarah Anderson and Porter McConnell, The Hill, April 30, 2018.