Maryknoll Office for Global Concerns

Representing Maryknoll Fathers & Brothers, Maryknoll Sisters, and Maryknoll Lay Missioners
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Economy of right relationship: CEO pay problem

The city government in Portland, Oregon is trying to address economic inequality by raising corporates taxes on companies whose CEOs make significantly more than their employees. The following article was published in the May-June 2017 issue of NewsNotes.

Catholic social teaching identifies economic inequality as a threat to the basic dignity and equality of all human beings. In “Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy,” the U.S. Catholic bishops write “unequal distribution should be evaluated in terms of several moral principles: the priority of meeting the basic needs of the poor and the importance of increasing the level of participation by all members of society in the economic life of the nation.” 

Economic inequality is also a threat to the integrity of Creation. Wealthy countries, and in particular, the wealthiest people in those countries, contribute the most to causing climate change but tend to be most immune to its effects. Some people have mistakenly blamed overpopulation as the principal contributor to climate change but in reality, people in countries with large populations, like India and China, contribute little to global climate change. 

Oxfam has estimated that the richest 10 percent globally create about half of greenhouse gasses while the poorest 50 percent have created only 10 percent of climate-changing gasses. This is because the lifestyle of the ultra-rich is highly taxing on Earth’s bounty. As Sam Pizzigati of the Institute for Policy Studies has said, an unequal planet can never be green.

Most policies created to address economic inequality focus on increasing the earnings and benefits for people with lower incomes. The city council of Portland, Oregon, however, recently set an important precedent by focusing on the other end of the income inequality spectrum: excessive pay for chief executive officers (CEOs). 

Starting in 2018, corporations in Portland whose CEOs make more than 100 times median worker pay will pay an additional 10 percent and those whose CEOs make more than 250 times will pay a 25 percent surcharge.

Explaining the need for the ordinance, the City Commissioner Steve Novick wrote, “Average worker compensation has grown just 10.3 percent since 1978, while compensation of chief executive officers has increased about 941 percent. Data from the Economic Policy Institute show that chief executive officers in the nation’s largest firms made an average of $15.5 million in compensation in 2015, or 276 times the annual average pay of the typical worker.”

“Rising inequality nationally is a major factor in Portland’s housing crisis,” Novick explained, “because huge disparity in income allows high-income people moving to Portland to drive housing costs out of reach of middle-class Portlanders.” 

Inequality has also been linked to decreasing life expectancy and child well-being, increasing crime rates, higher levels of mental illness, worsening health, and decreased social mobility.  

High levels of income inequality also affect those businesses negatively. A review of pay ratios and long-term shareholder returns by CtW Investment Group found that “companies with high estimated CEO pay ratios perform worse than companies with low CEO pay ratios over the following five years.” Business management guru Peter Drucker has written that the ratio of pay between executive and worker can be no higher than 20-to-1 without damaging company morale and productivity.

One major reason for the explosion in CEO pay is a tax reform law passed in 1993 that, ironically, was designed to rein in excessive CEO pay. It capped the tax deductibility of executive compensation at $1 million. But it included a loophole for stock options and other “performance” pay. As a result, the more corporations hand out in executive bonuses, the lower their tax bill. “This perverse incentive for excessive compensation has been a major factor in the explosion of CEO pay,” Sarah Anderson of the Institute for Policy Studies said. 

To respond to this, Senator Jack Reed (D-RI) has introduced the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act that would treat bonuses as salary and continue to cap salaries at $1 million.

The Portland law takes advantage of a part of the Dodd-Frank financial reform law passed in 2010 that requires corporations to publish the pay ratio between their CEO and the median wage of their workers. Corporations are to begin providing this information in their 2017 tax returns. A top priority of the Business Roundtable, which represents CEOs nationwide, is the repeal of this part of the Dodd-Frank Act.

Portland is the first of what will likely be more cities, and possibly states, to implement such laws. The states of Massachusetts, Connecticut, Illinois, Minnesota and Rhode Island are currently considering similar proposals.