Americans across the political spectrum are rightly fed up with up with overpaid CEOs. But many also feel there’s nothing we can do about this problem. That’s where they’re wrong.
People can use their power as workers, shareholders, and voters to rein in excessive CEO compensation and narrow the yawning gaps between executive and worker pay.
In a new report, the Institute for Policy Studies and the Congressional Progressive Caucus Center highlight innovative policy solutions that have gained some momentum but need stronger political support.
CEO pay-related tax reforms
A regulation in force since 2018 has required U.S. publicly held corporations to annually report the ratio between their CEO and median worker compensation. This disclosure rule sparked efforts at the federal, state, and municipal levels to tie the pay ratio to tax policies. These reforms aim to create an incentive to both rein in executive pay and lift up worker wages, all while generating significant new revenue for vital public investments.
Thus far, these efforts have been successful in two major cities. In 2016, the Portland, Oregon government adopted a surtax on companies operating in the city that have CEO-worker pay gaps of 100 to 1 or higher. San Francisco’s similar “Overpaid Executive Tax” became effective on January 1, 2022, with revenue expected to be about $125 million per year.
At the federal level, several pending bills would build on this momentum. Just last week, Senate Budget Committee Chair Sheldon Whitehouse (D-RI) and Representatives Barbara Lee (D-CA) and Alexandria Ocasio-Cortez (D-NY) introduced the Curtailing Executive Overcompensation (CEO) Act. This bill would apply an excise tax to publicly traded and private companies that have above a CEO-to-median-worker pay disparity of more than 50 to 1.
Under the excise tax formula, the rate owed would be proportional to the size of a company’s pay ratio and the size of their CEO’s paycheck. If a company has a pay ratio of more than 50 to 1, they would owe extra taxes and if they also have extremely high CEO pay, they’d owe even more. In 2022 alone, the bill would have raised more than $10 billion from the Fortune 100 largest U.S. companies, according to Senate Budget Committee staff estimates.
This new bill is slightly different in design but similar in intent to the Tax Excessive CEO Pay Act (S. 794/H.R.1979), a bill championed by Senators Bernie Sanders and Elizabeth Warren and Representatives Barbara Lee and Rashida Tlaib. This model applies graduated corporate tax rate increases starting with a 0.5 percentage point hike for companies that pay their top executives between 50 and 100 times more than their median workers. The highest penalty would apply to companies that pay top executives over 500 times worker pay. The bill would raise an estimated $150 billion over 10 years.
Efforts to curb CEO pay-inflating stock buybacks
President Biden and Congressional Democrats have pursued several means of curbing stock buybacks during the past two years. Big companies have been spending record sums on this financial maneuver, which artificially inflates the value of executive stock-based pay.
The 2022 Inflation Reduction Act introduced a 1 percent excise tax on CEO pay-inflating stock buybacks, a rate Biden would like to see quadrupled. The administration is also giving priority in the awarding of new CHIPS subsidies for domestic semiconductor manufacturing to firms that do not engage in any stock buybacks for five years. This important step should be expanded to all corporate recipients of federal contracts, grants, and subsidies.
CEO pay-related subsidy and procurement reforms
In addition to expanding the new CHIPS conditions on buybacks to all federal contractors and subsidy recipients, the administration should tie these taxpayer funds to incentives aimed at narrowing CEO-worker pay gaps. The Patriotic Corporations Act (H.R. 4186), championed by Rep. Jan Schakowsky, could serve as a model. This bill would grant preferential treatment in contracting to firms with pay ratios of 100 to 1 or less, among other “high-road” benchmarks, including neutrality in union organizing campaigns.
Rep. Mark DeSaulnier’s CEO Accountability and Responsibility Act (H.R. 3301) would provide similar preferences to encourage narrow pay ratios. The Congressional Progressive Caucus has called on President Biden to introduce such incentives.
Wall Street pay restrictions
The 2010 Dodd-Frank Financial Reform legislation included a provision (Section 956) banning Wall Street incentive pay that encourages “inappropriate” risk-taking. Regulators have failed to implement this rule, despite continued financial recklessness, as Public Citizen has thoroughly documented. But under the Biden administration, the responsible agencies have been working to finalize this regulation.
Senator Chris Van Hollen and Rep. Nydia Velazquez sent regulators a letter in April 2023 with specific proposals for rigorous implementation of these long overdue Wall Street pay restrictions. Their recommendations include a ban on stock options, long-term deferral of all bonus pay, and a requirement that executives personally pay the costs of fines resulting from recklessness.
The regional banking crisis of early 2023 led to a spurt of bipartisan Senate action to hold executives accountable. Senators Sherrod Brown and Tim Scott introduced legislation to enable the Federal Deposit Insurance Corporation to strip bonuses and stock compensation that executives took in the two years before a bank’s failure and impose on them up a fine of up to $3 million. This bill, the Recovering Executive Compensation from Unaccountable Practices (Recoup) Act (S.2190), passed out of the Senate Banking Committee by a vote of 21 to 2 but has seen no further action.
Extreme CEO-worker pay gaps are a problem for our society and economy
Why should our government take action on CEO pay? Excessive executive compensation is not just a problem for shareholders and employees of large corporations. It is a problem that affects all of us.
Extreme pay divides are a key driver of the inequality that is concentrating economic and political power in the hands of a privileged few. They also widen gender and racial disparities, since women and people of color make up a disproportionately large share of low-wage workers and a tiny share of corporate leaders.
Today’s CEO pay practices also incentivize reckless behavior that puts us all at risk. The 2008 financial crisis. when executives chasing bonuses drove our economy off a cliff, is just one example. The Institute for Policy Studies has documented how the CEO pay system has also perversely rewarded executives for slashing jobs, cooking the books, accelerating climate change, dodging taxes, and flooding communities with opioids.
Extensive academic research has also shown that extreme pay disparities are bad for business. We’ve compiled an extensive bibliography of studies showing how these gaps undermine employee morale and boost turnover rates.
In short, government officials have a responsibility to address a CEO pay problem that is causing wide-ranging social and economic harms. Fortunately, they have many policy options that could do the job.