A City Takes On CEO Pay

Public outrage over sky-high CEO pay runs across the political spectrum. Note, for example, how both major presidential candidates have been railing against it on the campaign trail.

Donald Trump has said huge CEO paychecks are a “complete joke” and a “disgrace.” Hillary Clinton has complained that it “just doesn’t make sense” for big company CEOs to make 300 times more than workers, especially when other countries’ gaps are so much narrower.

Neither candidate has offered much in the way of solutions. But that’s nothing new. In fact, on the problem of runaway CEO pay, American politicians are known for speaking loudly but carrying a small stick.

Frustrated with Washington inaction, some activists are taking the CEO pay fight local. Much like advocates for a federal minimum wage increase, they’re realizing that national change may need to bubble up from the grassroots.

These efforts are most advanced in Portland, Oregon, where the city council is holding a hearing on October 26 to consider what would be the nation’s first-ever surtax on corporations with wide gaps between their CEO and worker pay.

Firms that do business in Portland would owe a 10 percent surtax on the city’s existing business tax if they pay their CEOs more than 100 times what their workers receive. For example, if a large company owes the city $100,000 and has a pay ratio of 175-to-1, their surtax would be $10,000.

This policy would be easy to administer, thanks to a new Securities and Exchange Commission regulation that will require publicly held companies to report CEO-median worker pay ratios, starting with their 2017 pay figures.

The Portland government has already identified more than 500 corporations that do enough business in the city to be affected by the surtax, including many that regularly dominate the highest-paid CEO lists, such as Oracle, Honeywell, Goldman Sachs, Wells Fargo, and General Electric. The city estimates this reform would raise up to $3.5 million annually, new revenue that would go toward homeless services.

Portland is not the first to consider a tax penalty for fat executive paychecks. In 2014, a majority of the California state senate voted in favor of a similar proposal, but two-thirds was needed to pass a revenue bill. One of that bill’s chief backers, Mark DeSaulnier, is now a member of the U.S. Congress and has just co-sponsored a bill that would tie federal corporate tax rates to the CEO-worker pay ratio.

While our deeply divided Congress is unlikely to pass such a tax in the near future, eventual bipartisan support is not unthinkable. Last year, for example, Republican congressman Mick Mulvaney authored an amendment to block companies with pay ratios of more than 100-to-1 from receiving U.S. export subsidies. And a 2016 Stanford University poll found 74 percent of Americans feel CEOs are overpaid.

The Portland surtax could be the spark that lights a fire under other policymakers. Former Labor Secretary Robert Reich recently penned a supportive blog post about the proposal, saying “These efforts make sense. Cities and states — and, hopefully, eventually the federal government — should discourage huge pay gaps and reward socially responsible companies that keep executive pay within reasonable bounds.”

Doing so would promote not only economic fairness but also good business. Academic research indicates that large pay differentials undermine worker morale, and most recently, a Glassdoor analysis of data from 1.2 million people shows a statistical link between high CEO pay and low employee approval ratings for CEOs. This is why Peter Drucker, widely known as the Father of Management Science, believed the pay ratio should run no higher than 20-to-1.

The Portland reform would not by itself, of course, close our nation’s vast economic divide. But change needs to start somewhere. And if there’s a lesson in the living wage campaigns that are spreading like wildfire it is that reversing our nation’s extreme inequality will require bold action from the base.

Originally published by US News and World Report.

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies and is a co-editor of Inequality.org.