By Kevin D. Williamson
Thursday, January 23, 2020
As the Second Amendment protests loomed in Virginia, one
Democrat in the state senate scoffed that right-wing groups were getting their
members — and their donors — riled up over silly legislative proposals that
were unlikely ever to become law. There is some question-begging in that: What
happens at the margins of the political debate matters, and sometimes matters a
great deal, because it helps to define the universe of policy possibilities.
An additional consideration is that there exists a place
called “California,” which under single-party Democratic rule today functions
as the nation’s great loopy clearinghouse for dotty left-wing ideas — and, in
today’s California, these stand a reasonably good chance of eventually becoming
law. That fact should be of some concern to gentlemen such as Tim Cook and Mark
Zuckerberg and other executives of California-based companies that are being
targeted for a new regime of punitive taxation as part of the progressive
crusade against “income inequality,” the pejorative term for the reality,
uncontroversial outside doctrinaire Marxist circles, that some jobs pay more
than others.
Under legislation put forward by a state senator and
Democratic whip with the wondrously Dickensian name “Nancy Skinner” and
relentlessly hawked by Abigail Disney, a trust-fund doofus who has grown bored
of flying around in her father’s 737, the largest California-based companies
would face a heavy corporate-tax surcharge if they did not keep to Sacramento’s
preferred ratio of CEO pay to median worker pay. Nonconforming companies would
pay a tax rate of 14.84 percent rather than the 10.84 percent levied on those
that knuckled under to the state’s political mandate. At the higher rate,
California would have the nation’s highest corporate tax, along with the
nation’s highest state income tax and highest state sales tax.
The measure, Senate Bill 37, is unlikely to raise a great
deal of revenue, but this tax bill is not about taxes per se — it is about
weaponizing the tax code for moralistic political purposes. It is, in effect, a
sin tax on CEO pay — a sin tax on “obscenity,” according to Skinner. “We must
shrink the obscene gap between what wealthy CEOs make these days and what the
average worker takes home,” she says.
There are three problems with Skinner’s analysis, to the
extent that this half-digested bolus of self-righteous preening can be
described as an analysis. The first problem is that the more important variable
in the ratio of CEO pay to median worker pay is worker pay, which varies much
more greatly than does CEO pay among firms according to their lines of
business: A company with 10,000 cannery workers typically will have a lower
median wage than one with 800 software developers. The second problem, related
to the first, is that it is not the case that the median worker in any given
firm earns less because the chief executive earns more; labor markets
are complex, and firms do not enjoy the plenipotentiary power to set wages at
will. The third problem is that Skinner ignores the genuinely meaningful
correlation: Workers in the subset of companies under consideration in this
debate tend to earn much more at firms that are smaller, whether measured by
revenue or by number of employees, while executive compensation moves in the
opposite direction, with the bosses at the biggest firms earning much more than
their smaller-firm counterparts.
The reasons for that are easy enough to understand and do
not fit into Skinner’s adolescent moralistic narrative. This is attested to by
the data gathered by scholars at the Harvard Law School Forum on Corporate
Governance for a study of the compensation data from 2018, the first year for
which the relevant disclosures are available under the Dodd-Frank Act.
Globalization has, simply by increasing the size of
markets, greatly increased returns for successful investors and managers — and,
giving the cynics their due, for those who are able to convince corporate
compensation committees that they are likely to be successful managers. Small
gains in efficiency or growth in a $1 trillion market typically will bring
bigger rewards than similar gains in a $1 billion market. But very large,
complex, global firms typically have workforces that are paid less relative to
other publicly traded companies, often because their workforces are
disproportionately seasonal and located abroad.
So it is no surprise to learn from the Harvard study that
the CEOs whose compensation was highest relative to the median worker were also
those with the largest share of overseas workers on their payrolls and the
largest firms overall by revenue. The chief executives who earned the most
relative to the median worker were not Wall Street bankers or Silicon Valley
nerds but the CEOs of big consumer-goods companies: CEOs in the consumer-discretionary
sector earned on average 384 times what the median firm worker did, and those
in the consumer-staples sector earned 295 times what the median worker did. The
ratio for CEOs in information technology was less than half that (140 times the
median), and it was even lower for energy (80 times the median) and financials
(67 times the median).
Firms with revenue of less than $300 million had CEOs who
were paid on average about 32 times what the median worker earned, but firms at
the $10 billion mark had CEOs earning nearly 300 times what the median worker
took home.
There is not very much reason to believe that a
California tax provision is going to have the effect of raising wages at a
paper-goods factory in China enough to change the compensation ratio that
interests Skinner, though it could conceivably have some effect on
corporate-domiciling decisions.
The CEO–median ratio is pronounced among consumer-goods
companies, but similar trends hold true across large firms in general:
Companies with fewer than 500 employees had a median wage of $127,000, but
those with more than 10,000 paid a median wage of only $56,000. “The difference
is likely the result of large overseas and part-time workforces inherent in
larger companies,” the authors of the Harvard study conclude.
Interestingly, the consumer-discretionary and
consumer-staples sectors were the only two corporate groupings with CEO–median
ratios above the average of 144. Every other sector came in below that average,
meaning that a disproportionate chunk of the difference between CEO pay and
median worker pay is being driven by a relatively small number of firms in a
narrow slice of the economy — the one that simultaneously has the most to gain
and the most to lose from globalization, and the one that has the sort of
“good, middle-class” factory jobs that politicians are always talking about.
The trend in household income does not seem to be very
much correlated with developments in executive compensation. The turn of the
century was marked by two recessions, one of them relatively mild and one of
them very deep. The median real household income began a steep decline in 2000
and went into formal recession in 2001. In real (which is to say,
inflation-adjusted) terms, household incomes did not exceed their 2000 levels
until 2016, having plunged by a tenth from 2007 to 2012 before rising sharply
from 2014 until now. (I forgo the convention of tracking household income by
presidencies, because I am not a superstitious boob who believes that the magical
priest-king makes the crops grow by propitiating the gods.)
There are many factors at work there, from globalization
to changing social norms (the workforce-participation rate of men 25 to 54 has
declined just a smidgen since 1998, but the workforce-participation rate of men
20 to 24 has declined by a tenth) to catastrophically stupid experiments with
subsidizing subprime mortgages and then basing a whole bunch of economic
assumptions on the resulting asset bubble. During that time, CEO compensation
at the big firms went up and down, too — it fell by half from 2000 to
2002, to a measly $10.3 million! — but what executive pay at publicly traded
companies tends to track most closely is, no great surprise, the performance of
the S&P 500, as data from the Economic Policy Institute and others confirm.
The California proposal is nonsensical from an economic
point of view, and it is unlikely to do the thing that its sponsors say they
want it to do, which is to raise wages for workers with modest earnings. But
the data brought to bear in this discussion do suggest a desirable course of
action for American workers: Get a job at a company that is required to file
Dodd-Frank disclosures. The average annual wage for a worker in the United
States was just under $50,000 in 2018, but the average pay of workers at the
companies required to make disclosures under Dodd-Frank was nearly $81,000.
It is not obvious from that figure that their CEOs are
victimizing their employees.
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