How to Make CEO Bonuses Help the Little Guy

Few issues incense citizens more than the exorbitant bonuses awarded to corporate executives, and yet little has been done to stop this practice.

Just this week, published reports said AIG, which accepted a $180 billion government bailout, is set to pay about $100 million in bonuses to its employees.  It’s as if it is somehow un-American to prohibit our entrepreneurs and executives from earning more and more millions. even when average workers are struggling to make ends meet and taxpayers are footing the bill.

I offer a legislative proposal that will make everyone wish top executives Godspeed in their quest for the American dream: Allow executives of publicly traded companies, companies receiving public aid, and companies doing business with the government to earn as much compensation as their boards allow, as long as the total amount does not exceed 100 times the salary of that company’s lowest-paid, full-time employee.

For example, if the lowest-paid worker at a company earns the federal minimum wage (currently, $7.25/hour, yielding an annual income of $15,080), then the total compensation for the top executive (including stock options and yachts) would be limited to $1,508,000. If a company gives its lowest-paid worker a “living wage” (for a single mother with one child living in New York City, $19.66/hour), the worker would earn $40,893 and the top executive could take home more than $4 million. By way of comparison, annual compensation for S&P 500 CEOs now averages over $10 million, which is more than 300 times the annual pay of the average worker in those corporations.

It’s not that Americans begrudge all executives for earning millions. Bill Gates and Warren Buffet are generally revered and envied. Sports figures are heroes, despite earning millions. The problem is not the absolute bonus amount but rather the disparity between the haves and the have-nots.

It’s not that American workers live in abject poverty. Compared to workers around the world, Americans do very well. However, studies have shown that income disparity:

  • Disrupts a society’s social cohesion, reduces social capital and social mobility, and isolates us from each other;
  • Lowers society’s overall child health, well-being, and educational achievement;
  • Contributes to stress disorders including obesity, substance abuse, and cardiovascular disease, and may be a more important cause of mental disorders and distress than poverty itself;
  • Increases mortality by reducing hope, promoting self-destructive risky behavior, and igniting violence.

The malignant effects reach both the wealthy and the poor, and they are magnified by 21st century media that remind us 24/7 that disparities are ever-present.

Forty years ago, income disparity in S&P 500 companies was just 30 times between the highest-paid and average worker, but it has skyrocketed since then, in spite of the War on Poverty. According to economists, income inequality is at an all-time high: the top one percent of Americans now earn a quarter of all income in this country, and the top 10 percent of Americans now earn 50 percent of all income.

Income inequality is higher in the United States than in any other developed society in the world, save Hong Kong, which has no minimum wage. And it is not even close: our income inequality doubles the levels of most European societies. Within the United States, inequality is highest in the State of New York.

A version of the proposal that I offer, called the Income Equity Act, is regularly introduced to Congress but never gets out of committee. The act would deny a tax deduction to corporations whose executive incomes exceed 25 times the income of the lowest-paid employee. Another version links government contracts to corporate income distribution: more than three-fourths of the federal government’s top contractors now pay their executives more than 100 times the level of their average worker.

One might quibble with the ratio that I propose. Go ahead and make it 200. Or 50. If we begin to debate the magnitude of wealth disparity that we can tolerate as a society, then we are moving in the right direction.

Under the proposal that I offer, corporate executives would have an incentive to do what they rarely do -- think about the little guy. Every dollar-an-hour wage increase for the lowest-paid worker could bring a $200,000 bonus for the chief executive. The little guys would be cheering on the executives to lavish themselves with bonuses. It’s win-win.

Kenneth A. Dodge is the William McDougall Professor of Public Policy at Duke University. This commentary was also published in the Philadelphia Inquirer,Pittsburgh Post-Gazette and Raleigh News & Observer.