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Executive Pay

Taking the CEO Pay Fight Local

Research & Commentary
October 13, 2016

by Steve Novick

A member of the Portland City Council in Oregon explains his landmark proposal to use tax policy to tackle extreme CEO-worker pay gaps.

By Steve Novick

Inequality in the United States has exploded in the past four decades. In the 1970s, the top 1 percent collected about 9 percent of total income in America. By 2010, the disparity had grown even larger, and the top 1 percent had 20 percent of total income. Most of the concentration has gone to the very richest of the top 1 percent — the top 0.1 percent.

Steve Novick, a member of the City Council in Portland, Oregon, speaking at a rally.

Portland City Council member Steve Novick speaking at a recent rally.

In addition to income inequality, wealth inequality is also growing as wealth concentrates among the richest 0.1 percent of Americans. Even conservative estimates of wealth show that in 1992 the top 0.1 percent had 11 percent of the wealth in the United States, and that percentage grew to 14 percent by 2013.

Moreover, the dramatic growth of inequality has been fueled by very high compensation of a few managers at big corporations, as illustrated by the fact that 60 to 70 percent of people in the top 0.1 percent of income in the United States are highly paid executives at large firms.

The huge divide in income and wealth has real-world implications. Too many Americans cannot get a leg up. Too many mothers and fathers are working two jobs to try to earn enough money to keep a roof over their kids’ heads. A few extra dollars in those workers’ paychecks would go a really long way to helping that family stay housed and keep food on the table. But increasingly, those dollars are going to the people who already have it — and who aren’t at any risk of losing their housing or going hungry. Income inequality undermines the American dream.

That’s why I was glad to learn that the U.S. Securities and Exchange Commission adopted a rule in 2015 requiring public companies to disclose the ratio of the compensation of its chief executive officer to the median compensation of its employees. The new disclosure will help shareholders better evaluate chief executive officer compensation based on performance, and it offers local, state, and federal governments a tool for establishing policies that address increasing ratios of chief executive officer to median worker pay.

[pullquote]A new federal disclosure rule offers local, state, and federal governments a tool for addressing increasing CEO-worker pay gaps.[/pullquote]

I want Portland to be among the first local governments in the country to begin using the new SEC data about CEO and worker pay to address growing income inequality. I have proposed adding a surtax on the City’s existing Business License Tax for publicly traded companies that report a ratio of CEO to median worker pay of 100:1. The tax code is often used to promote certain social policies. The deduction for charitable giving, for example, promotes charitable giving. If adopted, this proposal would promote a more equitable distribution of income.

The City’s Revenue Bureau estimates that this proposal will raise $2.5 to $3.5 million annually, and I’m proposing to use that revenue to pay for services that help people who are homeless get housing — or, help people avoid homelessness altogether. This year, the Portland City Council and the surrounding County created the new Joint Office for Homeless Services, which will help at least 4,300 people move off the streets into permanent housing and assist 5,600 people at risk of becoming homeless.

As part of the Intergovernmental Agreement to form the office, the City committed $15 million in funding. In the current budget, however, the City has only allocated $11.5 million beginning next year, leaving a $3.5 million gap that will need to be filled in order to honor our commitment to the County and ensure the continued success of the office.  The revenue from the proposed surtax will help fill this funding gap.

The surtax I’m proposing would give companies an incentive to narrow the economic divide within their own firms—by lowering CEO pay and/or by lifting up their workers’ wages. Of course, this reform alone will not close our nation’s economic divide. But it would send a powerful message that our community is ready to take a stand against the extreme inequality that harms all of us. And if other local and state governments, as well as Congress, begin to use the SEC information to drive policy, we will see change as shareholders recognize the collective effect of policies like my proposed surtax. California and Rhode Island have both considered similar policies, and I’m hopeful Portland could help lead the way on this critical issue.

[pullquote]This tax reform would send a powerful message that our community is ready to take a stand against the extreme inequality that harms all of us.[/pullquote]

Other facts about income inequality and CEO compensation:

  • Research indicates that companies with high estimated chief executive officer-worker pay ratios have lower employee morale and lower shareholder returns compared to companies with lower ratios. For example, the job site Glassdoor analyzed 1.2 million chief executive officer ratings from current and former employees, finding that higher chief executive officer compensation is statistically linked with lower approval ratings for those executives. A review of pay ratios and long term shareholder returns by CtW Investment Group also found that companies with high pay ratios perform worse than companies with lower ratios over a five-year research period.
  • Pay inequity isn’t just unfair.  It has significant ramifications for individual workers and families. A 2008 National Bureau for Economic Research paper by Janna Matlack and Jacob Vigdor concludes that when incomes at different socioeconomic levels rise at different rates (when rich people get higher percentages of raises than poor or middle income people), the cost of goods also rises. This means that poor people and middle income people have the same money available to them, but their cost of living rises, creating a wage gap that only gets worse as more time goes by. This is particularly true when it comes to housing.
  • Income inequality specifically hurts housing affordability, especially in tight housing markets like Portland’s.  In the same paper referenced above, Matlack and Vigdor conclude, “in the United States, tight housing markets tend to be those where incomes are rising rapidly at the high end of the distribution, while incomes at the low end trend upward only slowly, if at all. In these areas, the poor have experienced greater crowding, higher quantity-adjusted rents, and have less income available for savings or other consumption once they have covered their housing costs.”

The Portland surtax proposal will come before the City Council for a public hearing on October 26 at 2 pm Pacific Time. The hearing will be broadcast live and written comments can be submitted in advance to members of the council.

Originally published on the web site of the City of Portland.

Steve Novick is a member of the City Council in Portland, Oregon.

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