Pay inequities hurt America

April 03, 2010

In his thought-provoking March 25 column ("What's wrong with a little class warfare?") Dan Rodricks quoted a recent Economic Policy Institute report as stating that "The ratio of CEO compensation to average worker pay rose from 24:1 in 1965 to 262:1 in 2005." This rapidly swelling pay divide certainly raises some serious concerns.

In the first place, pay disproportions of this magnitude may serve to undermine worker morale and motivation and thereby further America's already growing decline in world competitiveness. In addition, the unethical nature of pay inequity at this scale could undermine employees' communal sense of obligation and duty -- why should workers push themselves to high standards for, say, $15 to $25 dollars per hour while watching their companies' CEOs and other senior managers compensate themselves at as much as $5,000 in that same hour?

Finally, since in many cases these senior executives have also been the ones who enact the layoffs of millions of American workers, this compensation unfairness spreads damage far beyond the walls of the individual firms involved. Layoffs create a double taxpayer burden, since laid off workers are no longer able to contribute to, and must now be supported by, the tax base. Such tax base reductions are usually followed by community erosion from cuts in police, fire, public education and other vital services. Thus the question arises whether these executives are increasing their corporate profits -- and their own paychecks -- at the expense of not just their own employees but also of all working taxpayers.

If this is in fact the case, then remedial legislation is clearly needed. One reasonable approach might be the creation of a federal fund to soften the economic impact of these layoffs. Such a fund could cover the dual costs of increased individual unemployment benefits and of additional support to the community tax base. The fund could be maintained through mandatory corporate contributions based on executive pay levels as multiples of average worker pay, with the highest contributions required of corporations with the highest executive pay multiples. Corporate deposits to this fund could then be levied on a progressively graduated scale; for example, 20 percent of executive compensation ranging from multiples of 25 to 50 times average worker pay, 40 percent from compensation multiples of 50 to 100, 60 percent for multiples from 100 to 150, and so forth.

Compensation equity legislation along these lines would benefit our cities, our states and our entire nation. It would reduce the personal and community impacts of layoffs while also increasing worker motivation and productivity, thereby helping to bolster American competitiveness abroad. Even more, it would prompt corporate shareholders to establish reasonable ratios between their senior executive compensation and that of their employees. After all, aren't these the same employees whose solid efforts and long hours created their corporations' profits in the first place?

Jay Williams, Baltimore

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