Democratic lawmakers want companies to pay up for massive CEO compensation

At 45 major U.S. companies, the CEO took home 1,000 times — or more — what a median worker earned in 2019 and 2020, according to the AFL-CIO. Now, as many American workers are struggling to get by during the coronavirus pandemic, a group of lawmakers unveiled a new proposal to take on the extreme gaps between CEO and worker pay in the United States.

The "Tax Excessive CEO Pay Act" would penalize companies that pay CEOs or other highest paid employees 50 times more than the median pay for workers. If the median employee pay was $55,000 per year, a CEO could still make up to $2.75 million before the penalty kicked in.

While CEOs have always made more than rank-and-file workers, the ratio has ballooned in recent decades — and wages for top executives have increased dramatically faster than average workers'.  The Economic Policy Institute found CEO compensation had surged 940% from 1978 to 2018 while the typical worker pay had risen only 12% over the same timeframe.

"Incredibly, if income inequality had remained the same as it was in 1975, the average worker in America would be making $42,000 more than he or she is earning," Senator Bernie Sanders, an independent from Vermont, said during a hearing Wednesday on income inequality. "Instead, as the number of billionaires explodes, the average worker in America is now making $32 a week less than he or she made 48 years ago."

Walmart's CEO made 983 times more than the median Walmart worker as of last year, according to the company's financial disclousures, taking home $22.1 million while the typical associate earned just $22,500. At CVS Health Corporation, it was 790 times the median employee's pay in 2019. At JPMorganChase, whose median employee makes a healthy $80,400 per year, the CEO took home 393 times that amount last year. 

The shift "didn't happen because the CEO got much smarter or way better," said Sarah Anderson, director of the global economy project at the Institute for Policy Studies, during the hearing. "On the worker end, it's because wages and unions have declined. On the CEO end, it happened because of the shift to stock-based pay. The argument was that stock-based pay would pay for performance, and that has really turned out to be a joke."

The proposed tax increases would begin at half a percentage point for a company that pays a CEO between 50 and 100 times that of its average workers, and increase gradually to 5% for companies that pay the top executive more than 500 times what the median worker earns. In 2019, the CEOs of S&P 500 companies received on average $14.8 million in compensation and the average CEO-to-worker pay ratio was 264-to-1, according to the AFL-CIO.

The bill's sponsors said the proposed penalties would raise around $150 billion over 10 years, should current pay ratios continue.

But pay experts said penalties may not be the best way to tackle the growing disparity and could have unintended consequences.

"Bills of this nature, they do give the incentive for companies to reduce the pay ratio, but they can do it in lots of ways," said Steven Balsam, a professor of accounting of Temple University Fox School of Business. Rather than limiting CEO pay or raising workers' wages, companies could reduce their number of employees, including lower-wage workers. The move could also prompt companies to go private.

The proposal does try to stave off some potential tax avoidance. Privately held companies that take in $100 million or more would also have to make pay ratio data public, as public companies do. The measure would also require the Treasury Department regulate companies that take other actions, such as relying on contractors rather than employees, to avoid the penalty.

A survey conducted by Stanford University in 2019 found 86% of Americans believed the CEOs of large, public companies are overpaid. The sentiment crossed political and income lines, with 81% of Republicans and 92% of Democrats believing CEOs are overpaid and 83% or more of low-, middle- and high-income Americans did as well. 

"The average person out there actually understands the economics that it's a bigger job, you're going to get paid more, and if you perform better, you're going to get paid more and things like that," said Stanford University professor of accounting David Larker. But he noted people did not even know the full extent of it. "They thought [CEOs] were paid a lot less than what they were actually paid."

This is not the first proposal for a tax on companies for excessive pay gaps. A majority of voters in San Francisco approved a ballot measure for an additional tax on businesses where the highest paid employee earned 100 times the median pay for employees. It follows a similar move in Portland, Oregon in 2016, where the city passed an ordinance taxing publicly traded companies where CEO compensation was 100 times or more that of the median employee.

Irina Ivanova contributed to this report.