Friday, October 31, 2008

What we need to do NEXT Part 2

This is the second part in a series. For the introduction and first part, read yesterday's entry. By the way, normally I include end notes for each individual blog post. This time I'm going to create end notes for the entire series. I should have mentioned in the first post that these suggestions are being posted in no particular order.

Wage Disparity

Now, once we have taken care of the coming credit crunches, we need to deal with a serious problem of income disparity. Are you aware that in 2005 the average CEO made over 821 times what the lowest paid employee that worked for him or her made? Ten years earlier it was about 275 times. So, if the average company has an employee making California’s minimum wage of $8 per hour, then the CEO of said average company was probably making around $6,568 per hour, and making around $13 Million per year (assuming 40 hour work weeks and 50 weeks per year.) That compares to the roughly $16,000 that the employee made. So the CEO made in less than 3 hours what his or her lowest paid employee made in a year.

I’m going to be honest. I really don’t believe that any CEO is worth that much. I might have a different opinion of this if executive pay rates went up only while a company was doing well. This has not been the case. Studies show that executive pay rates go up regardless of how a company is doing. Executive pay boards, which are used at most companies to determine how much company executives should be paid, are usually made up of CEOs at other companies. Imagine if you could have your friends decide how much you should get paid. That is exactly what these CEOs are doing, and it explains why executive pay can go up even when the CEO of the company is running the company straight into the ground.

So, how do we tackle this? Do we increase minimum wage to $400 per hour? Oh, heck no! That really would cause inflation and monetary devaluation. Let’s not go there!

I have a much better way of dealing with this.

Let me sketch this out instead of giving a detailed plan. You’ll see why later.

Instead of setting the minimum an employee can make, we set up a maximum disparity between the lowest paid employee and the highest paid employee or executive at a company. If the company goes over that multiple, then it forfeits all tax deductions.

Wait, what would be the outcome of that? Well, some companies would choose to increase the minimum pay of their employees to allow the executives to keep being paid well. That would increase the disposable income of those employees and increase the tax base simultaneously. Some companies would choose to pay their executives less, leaving more money for the company to invest in expansion, diversifying their product lines, or research. Some companies would choose to do neither. These companies would end up paying the government higher taxes, which could help offset tax breaks for individuals. Most companies would do some combination of these.

Now, how would we flesh this out? My first suggestion is to set the multiplier to 100 to 150 times the minimum employee’s pay. This ensures an executive pay of $1.6 to $2.4 million annually at a minimum. If the company wants to pay their lowest compensated employee more, then the executive’s pay would only go up. At $10 per hour the executive compensation goes up to $2-3 million.

Next, we count all compensation in this formula excepting only commission pay. Stock options? Count. Stocks? Count. Company condo? Count. Vacations? Count. Sold that multi-million-dollar super-computer to the government and got a $5 million dollar commission? Not covered. You made it, it’s yours. The best businessmen often pay their salesmen better than they pay themselves, realizing that a good salesman will bring in business that they can’t get themselves.

Now there are a couple of areas that I haven’t filled in yet even in my own mind. Do we want to implement this plan immediately, or phase it in over time? Do we want the cut-off point to be a hard cut-off, or do we want to phase-in the reduction in tax-breaks? How do we count contracted or temporary employees? Do we count the employees of a firm contracted to do certain kinds of services, such as janitorial firms? These can, and should, be debated at length.

One of the things I really like about this plan is there is so much room for compromise. Go ahead, change the multiplier! Count stock options differently than straight pay! Leave out corporate jets! Phase it in over time, or not! Allow companies to wait until the current executive contracts are over before it counts! All is negotiable!

It also allows every company the flexibility to determine what is an acceptable way to meet these goals. They can pay their executive less, or their employees more, or some combination. Maybe paying all of their corporate taxes is perfectly acceptable to some companies.

The upshot is that employees are going to be paid more, and more will be paid in taxes to the government. This is a win-win situation for our country.

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