The Excessive Compensation Assessment
How much did the average CEO of America's 500 biggest companies collect last year? Well, it was probably at least a million dollars, right? Nope, that's their pocket money. More than two million? Sorry, that doesn't even get them out of bed in the morning. More than three million? You're headed in the right direction. More than five million?!? Getting warmer. More than ten million dollars?!?!?! You're almost there.
According to Forbes magazine the average CEO of one of our largest companies received approximately $10,200,000 last year:
"The heads of America's 500 biggest companies received an aggregate 54% pay raise last year. As a group, their total compensation amounted to $5.1 billion, versus $3.3 billion in fiscal 2003."America's top 500 business executives raked in almost TWO BILLION dollars more in personal income in 2004 than they pocketed in 2003?!?!? Did I miss something last year or did the corporate earnings of America's 500 largest companies increase by more than 50%? Did the prices of their stocks and bonds jump by more than 50%? Did our national economy grow by more than 50%?
In short, what the hell is going on out there? Something is seriously wrong with this picture.
And it's not just the top 500 business executives, either. Since the advent of Reaganomics in 1980, the percentage of the total American income received by the top percentiles has increased steadily. Notwithstanding the dip in incomes since the bust of the Internet bubble earlier this decade, according to an economist at the University of California, Berkeley, the percentages of total income received by the most highly compensated Americans has risen to levels comparable to the Roaring Twenties. How bad is it? The top 10% receives of more than 40% of all income; the top 1% gets 15% of all income; the top 0.1% gets 6% of all income; and the top 0.01% gets 2% of all income, or 200 times more than the average American wage-earner!
This gaping disparity in incomes yield two distinct questions. Ethically what, if anything, can the American people and their elected representatives do to diminish them, and even if it is ethical to diminish them, what, if anything, should we do?
To begin, the ethics of "fair market" capitalism (i.e. the regulated "free-market" capitalism that exists in today's industrialized democracies) forbid the placement of some kind of hard or fixed limitation upon the amount of personal compensation that any individual receives. Significant pecuniary rewards are justified for those who take advantage of the opportunities presented to them by the marketplace and in so doing realize significant economic achievements. In a capitalistic environment, those achievements produce economic value, and the reward for the production of economic value is the acquisition of private property. Fixed limitations upon personal remuneration cannot be implemented ethically because corresponding limitations cannot be placed upon personal initiative and accomplishments. Because we are capable of producing virtually anything, we should be capable of earning virtually anything. Placing a fixed cap upon personal income would certainly imply and probably induce the placement of a fixed cap upon personal productivity, which is the antithesis of the Americanism. Although Horatio Alger is more of a myth than a reality, he endures as an integral component of the American self-definition.
The reinstatement of the steeply progressive tax rates of Lyndon Johnson's Great Society is not an ethical solution either. Although the taxation of income is ethical, the more progressive the rate of taxation becomes, the less ethical it becomes. The opportunity to acquire personal property exists as a direct result of the stable and secure economic environment created and maintained by our federal government. Therefore, our government is entitled ethically to be compensated for the services it provides, which it receives in the form of personal income taxation. The syllogism is simple: personal remuneration cannot exist without profit; profit cannot exist without a stable and secure marketplace; and a stable and secure marketplace cannot exist without government. Thus, since personal remuneration could not exist without government, income taxation is ethical. Because it is based on the same principle as an income cap, however, the steeper the progression, the less ethical and productive it becomes. Highly progressive individual tax rates might narrow the huge chasm between the incomes of workers and executives, but they also reduce the incentive for personal productivity concomitantly. This ancillary consequence renders them an economically inefficient and counterproductive method of mitigating income disparities.
Conversely, the most fundamental precept of the American government can be summed up in Lord Acton's famous aphorism, "Power tends to corrupt, and absolute power corrupts absolutely." Hence, the founders of the United States created an elaborate system of checks and balances in order to mitigate any dangerous concentrations of political power. Economically, the possession of large amounts of property connotes the possession of cultural power. Since both political and economic power tend to corrupt, it follows that massive accumulations of capital tend to corrupt those who possess them and the economies in which they operate. Thus, although the placement of a fixed cap upon income or steeply progressive tax rates would be contrary to America's economic ethic, placing some kind of check so as to discourage excessively large personal incomes appears to be economically analogous to the political ethos upon which our nation was founded.
If placing some kind of check against dangerous concentrations of economic power represented by excessive incomes is valid ethically, what would be the practical consequences of doing so? In other words, even if we can do it, should we? As socially and economically inefficient allocations of scarce financial resources, massive concentrations of income tend to discourage genuine economic productivity in two ways. First, excessive compensation inefficiently diverts the capital resources of private corporations from more productive applications such as dividends, investment, product research, market development, and employee benefits. Second, it engenders the complacency and arrogance inherent in excessive affluence. The acquisition of property induces productivity; the possession of it induces apathy. Ethics notwithstanding, economic efficiency implies the validity of placing some kind of negative economic pressure upon excessive compensation.
Therefore, we've arrived at an apparent conundrum: if checks upon concentrations of economic power are both ethical and efficient but imposing a fixed limit or a steeply progressive tax rate upon personal income is not, what, if anything, should our government do to reduce the American income gap?
Since our economy relies upon an open labor market to determine the degree of personal remuneration, that same open market must be relied upon to determine a commensurate amount of governmental compensation. When any private organization compensates its employees exorbitantly, despite the adverse effect this compensation has upon the individual recipient, the organization itself and society at large, it implies that the government, by facilitating this compensation, must be entitled to a correspondingly exorbitant amount of remuneration, as well.
Companies are legal fictions created by governments. Unlike people, their very existences would not be possible without governmental assistance. Thus, any economic success that these organizations enjoy that is disbursed to its owners or operators subsequently as extravagant compensation could not occur without the direct cooperation and assistance of government. Since our public institutions share in the responsibility for the economic success of these private organizations, whenever the degree of that success justifies an organization to provide any individual with an excessive amount of personal remuneration, then the government is ethically entitled to an equally excessive amount of public remuneration. Therefore, because the government has provided these private organizations with the public conditions that have enabled them to realize a degree of prosperity that permits luxurious remuneration, it is entirely ethical and appropriate for that government to receive a similar degree of luxurious remuneration, a corporate luxury tax if you will, as compensation for its efforts.
In sum, although the federal government should never discourage excessive individual achievement or the remuneration it implies, it can and must discourage private companies from compensating their owners and employees excessively.
As a result, Congress must enact an Excessive Compensation Assessment (ECA). The ECA would be a graduated, non-deductible surcharge payable by any economic entity that provides any form of personal compensation in excess of $1 million per year, and it would be applied at a rate of 10% per million dollars of income per year. In this way, the ECA would be more similar to the limitations placed upon the personal remuneration of professional baseball players than professional basketball players: it does not institute a fixed salary cap; rather, it imposes a surcharge upon those organizations that compensate their employees lavishly. For example, a corporation might provide its CEO with $8 million in annual compensation for the essential private services that this individual rendered to it. If it did so, it would then also be compelled to provide the federal government with an ECA surcharge of $6.4 million (80% of $8 million) for the essential public services that the government rendered to it. Of course, the ECA would compel corporations to match any annual remuneration in excess of $10 million on a dollar for dollar basis. If the ECA surcharge should increase the cost of conducting business for a corporation, this cost is undoubtedly justified by the increased value that this excessively compensated individual has added to that corporation's productivity.
In conclusion, just as in any uncontrolled market, a laissez faire approach to executive compensation will yield unethical and inefficient concentrations of power inexorably. Concentrations of power that affect a particular industry create monopolies, which is why Congress adopted the Sherman Anti-Trust Act as well as a myriad of other laws designed to preclude the creation of dangerous and inefficient consolidations of economic power. Concentrations of power that affect the personal incomes of the leaders of every industry create aristocracies, which is why Congress must adopt the ECA. Much like the flip side of the same coin, just as a fixed cap on income is the antithesis of Americanism, so too is aristocracy. Successful private companies that choose to compensate their employees generously must extend that same generosity to the public institutions that facilitate these profligate incomes. The ECA will provide the United States government with a commensurate amount of public income for the lavish private remuneration it abets.