CEOs did not cause the pandemic. But they deserve a good deal of the blame for a model that shoveled profits up the corporate ladder, leaving lower-level employees financially insecure. When Covid-19 struck, it didn’t take much to push millions of vulnerable workers over the edge.
If we want to not only survive the pandemic but emerge as a nation more resilient to future crises, we need to reverse these obscenely unfair pay practices.
San Francisco voters have just taken a significant step in that direction.
By a margin of 65-35, they voted to approve a ballot measure, Proposition L, to increase taxes on corporations with extreme gaps between CEO and worker pay. The measure required only a simple majority to pass.
Specifically, the proposal will increase tax rates on local business revenue, ranging from an additional 0.1 percent on corporations that pay their CEO more than 100 times their typical San Francisco worker pay to 0.6 percent for companies with pay ratios of 600 to 1 or more.
To get a sense of the potential impact on specific companies, consider McDonald’s. Last year, CEO Stephen Easterbrook made $17.4 million before stepping down in November. That’s about 522 times as much as one of the fast food giant’s crew members would make earning San Francisco’s $16.07 minimum wage on an annual, full-time basis.
Unless McDonald’s makes big changes to its pay practices, these numbers suggest the company will owe a tax increase on the higher end of the proposed range, as a percentage of sales from their 16 or so San Francisco restaurants.
The benefits of the ballot measure are twofold. It will encourage corporations to narrow their pay gaps while generating revenue for programs to reduce poverty and inequality. City officials estimate the tax will raise $140 million per year.
San Francisco will be the second city in the nation to adopt a tax on large CEO-worker pay gaps. The first was Portland, Oregon.
For the tax design nerds out there, let me point out some differences between the San Francisco proposal and the Portland tax:
- The Portland measure uses CEO-worker pay ratio data large publicly held corporations already have to report to the Securities and Exchange Commission. Under the San Francisco model, companies will need to make some additional calculations.
- Under the SEC regulation, companies base their median worker pay figure on their global workforce and they may not convert the compensation going to part-time employees to full-time equivalents.
- Under the San Francisco plan, median worker pay is based on employees working in the city of San Francisco and the companies can convert part-time wages into full-time equivalents. (This will narrow the pay ratios at companies that rely heavily on part-time employees)
- Because Portland uses SEC data, the tax applies only to publicly held corporations, whereas the San Francisco reform covers all companies (except small businesses with less than $1 million in sales), regardless of their ownership structure.
- Due to differences in local business tax structures, the base of the two cities’ tax differs. In Portland, the surcharge is on a local business profits tax. For most companies in San Francisco, the increase will apply to the city’s existing gross receipts tax. The exception is for operations that are mostly engaged in administrative or management services and thus don’t have significant local sales. If these companies have more than 1,000 employees and more than $1 billion in annual sales nationwide, they would be subject to a tax increase based on the size of their local payroll.