Let's Close the CEO Salary Loophole

By Chuck Collins

This article is from the July/August 1997 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org

This article is from the July/August 1997 issue of Dollars & Sense magazine.

issue 212 cover

Executive salaries are like Charlie Chaplin's classic scene in The Great Dictator. Mussolini and Hitler are sitting in a room together, each one trying to figure out how to gain some height advantage over the other. Suddenly, the two start pumping their barbershop chairs higher and higher, only stopping when they hit the ceiling.

But for America's CEOs, there doesn't seem to be any ceiling. Even Business Week reports that executive pay is "out of control," with mobile home financier Lawrence Coss, CEO of Green Tree Financial Corp., winning first place in this year's pay follies. A minimum wage worker living in a mobile home financed by Green Tree would have to work over 7,500 years to earn the equivalent of Coss's $102 million pay package.

While average wages for all workers rose 3% in 1996, the average CEO salary and bonus rose 39% to $2.3 million -- and that is without stock options. Benefitting even more than average were the top managers of the 30 U.S. corporations that laid off the most people last year, according to a new study, "Executive Excess: CEOs Gain from Massive Downsizing," by the Institute for Policy Studies and United for a Fair Economy. The axmen who laid off between 2,800 and 49,000 workers last year upped their own compensation by 67%.

Meanwhile, the pay ratios between top executives and average workers in most Asian and European countries are not even 30 to one; the same with at least some U.S. companies. The office furniture maker Herman Miller Co. limits executive salaries and bonuses to 20 times the average paycheck in the firm. Management consultant Peter Drucker advised the Michigan company to embrace this pay ratio to strengthen the company's team culture and productivity.

Most corporate leaders would say any government regulation of CEO pay is an outrageous interference in the free market. But the government is already involved in CEO pay -- through the U.S. tax code. The tax code allows businesses to deduct "a reasonable allowance for salaries or other compensation." The catch is that the code doesn't define "reasonable." So companies can -- and do -- routinely deduct the entirety of grotesque executive pay packages. Corporations pay less in taxes than they should, and regular taxpayers pick up the slack.

One fair-minded way to end this chronic corporate welfare comes from Rep. Martin Sabo of Minnesota. His Income Equity Act would allow corporations to deduct only executive compensation up to 25 times the pay of a firm's lowest-paid workers. If passed, corporations would have to either reduce top salaries or lift pay at the bottom to get their tax break.

Last year, the top 365 U.S. firms avoided paying $514 million with salary deductions for their top two employees alone. The billions saved by closing the CEO salary loophole could be spent helping downsized workers with job retraining and placement. That's a message that Congress shouldn't ignore.

Chuck Collins is the codirector of United for a Fair Economy.

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