Portland, Oregon has further demonstrated its left-wing progressive quirkiness that is often lampooned in the cable network show Portlandia. Recently, the Portland City Council passed an ordinance imposing a surcharge on companies whose CEOs earn more than 100 times the median pay of their rank and file workers. If a company that resides in Portland pays its CEO above the 100 times threshold, the company will be subject to an additional 10% tax. And if they pay the CEO above 250 times the median pay of the rank and file, the surcharge increases to 25%.
It is estimated that there are 550 companies in Portland that could be effected by this new income inequality law.
The taxing ordinance will take effect in 2017 and is meant to coincide with Dodd-Frank legislation that puts the Securities and Exchange Commission in charge of requiring publicly traded companies to report CEO compensation in comparison to their rank and file’s pay.
The New York Times reports that this surcharge will be levied as a percentage of what the employer pays on its yearly business license tax. New monies from this surcharge are estimated to add $2.5 - $3.5 million dollars to City funds – that is before some of those companies figure out a way to move down the street to the nearest suburb of Portland. Of course some companies, such as the local utility company or perhaps the pro basketball team, may have to stay. However thinking about it, the Detroit Pistons have been located in Auburn Hills for quite some time. But let’s not digress.
This concept of penalizing companies that pay their management excessively has been gaining ground for some time in academia and the media. The Dodd-Frank federal law was implemented in 2010 requiring federal reporting on pay by pubic companies in an attempt to bring this pay inequality further to light and perhaps shame companies into increasing rank and file pay or lowering executive pay. It was reported in 2015, a year in which CEO pay actually fell, that median income for the highest 200 paid executives at public companies was $19.3 million. This was up over $9.6 million in the previous five years. A 2014 study by the Economic Policy Institute found executive pay had increased from just 20 times the median pay of rank and file in 1965 to nearly a 300 times difference in 2013.
These perceived and maligned inequalities have now lead to the idea of corporate tax penalties. The current Mayor of Portland stated that income inequality is a national problem and Portland has a “habit of trying things…. maybe they are not perfect in their first iteration. But local action replicated around the country can start to make a difference.”
Though “out there” a bit farther than most states or municipalities, Portland is not alone in attempting to address the issue of pay inequality. Other states have considered bills that would reward companies if they narrow pay gaps. California attempted to pass a 2014 bill reducing taxes for companies whose executives were paid below the “100 times pay gap” level. It failed to pass.
Outrageous pay for mediocre company performance is poor business practice. However, there are owner-executives that work hard and take on personal financial risks and receive well-earned compensation for those efforts and sacrifices. Should a company that is rightfully compensating these executives be penalized?
Sources: "Portland Adopts Surcharge on C.E.O. Pay in Move vs. Income Inequality", New York Times 12/7/2016; "Top C.E.O. Pay Fell — Yes, Fell — in 2015", New York Times 5/27/2016