CEO Salaries Hit Record High Last Year: Is It Time for a Tax Change?

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It has been a very good year for America’s Chief Executive Officers. They’re getting a raise after all. The median pay of CEOs is going up across industries and California’s state legislature is considering take a swing at companies pay disparity — although that swing may very well miss. All CEOs across the U.S. are seeing a boost of 9 percent up to a median pay of $10.5 million a year. Healthcare CEOs are seeing the juiciest paychecks, at $12.3 million a year, according to The Associated Press. The industry seeing the highest increase however, with the second highest salary was the financial industry, at $12 million and a 22 percent increase.

The New York Times put the average CEO pay closer to $15.1 million last year, a 16 percent jump from 2011. This is a bit over The Press’ more conservative estimates. The Times got its numbers from Equilar Inc., a firm that analyzes executive pay. Regardless of which you look at, these are some pretty incredibly increases, a pattern repeated over the last four years, each of which having shown a pay increase. In fact, last year was the first time the median salary jumped over eight figures, according to The Press. Prior to that, the recession was still taking a tole and increases weren’t as likely across suffering industries.

What has politicians — specifically, two California state senators — so riled up is what this means for pay disparity for workers. According to PayScale, a website that compares Fortune 100 CEOs pay to their median annual employee pay, the largest salary discrepancy is seen in Wal-Mart (NYSE:WMTwith a 1034 to 1 ratio between the CEO’s annual pay of $23.15 million, and median annual employee salaries of $22.4 thousand. The lowest? Google (NASDAQ:GOOG) (NASDAQ:GOOGL), where Larry Page draws $1.00 a year compared to the $102 thousand median pay of employees.

However, when it comes to the potential California tax law, it’s companies based in the golden state, like Walt Disney (NYSE:DIS), McKesson (NYSE:MCK), Apple (NASDAQ:AAPL), and Wells Fargo (NYSE:WFC) that have to worry. Disney’s CEO Robert A. Iger makes 557 times what his median employees do, McKesson’s head makes 313 times as much, Apple’s 192 times as much, and the Wells Fargo CEO makes 186 times as much as their median employee.

Senators Mark DeSaulnier and Loni Hancock are looking to make a tax repercussion for those CEOs who make more than 100 times the median wage of their workers. Under 100 times the salary and taxes go down for the company, and over, it rises to as high as 13 percent, the maximum. “Supreme Court Justice Louis Brandeis warned that we may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both,” said Senator DeSaulnier. “SB 1372 (the bill in question) begins to address the growing concentration of wealth at the very top. Out of control income inequality is a direct threat to American democracy.”

From Senator Hancock point of view, the bill would correct for an economically problematic company practice. “Almost everyone recognizes CEO pay is wildly out of control,” he said. “As former Labor Secretary Robert Reich has pointed out — the growing divergence between CEO pay and that of the average worker isn’t just unfair, it is bad for the economy.”

So let’s take a look at specifically what Robert Reich had to say. In an op-ed with The Huffington Post published last year, he pointed to the major increase in CEO pay and to America’s tax code, saying that, “You and I and other taxpayers are subsidizing this sky-high executive compensation. That’s because corporations deduct it from their income taxes, causing the rest of us to pay in taxes to make up the difference.” He also claims that shareholders take no the brunt of business losses, while CEOs continue to be paid. On his personal blog, he also emphasizes what he calls “the ‘paid-what-you’re-worth‘ myth,” arguing that workers and CEOs alike are in no way paid what they deserve.

Before everyone begins shouting all at once about government power overstepping its bounds, individual rights, and private business, let’s be clear on one thing. The bill realistically isn’t going to get through the state senate. Those CEOs won’t be popping Tums and trying to keep their blood pressure down any more than usual because of this bill put before the California senate. For one thing, while deeply rooted businesses would probably take the hike and deal with the repercussions, it would discourage other new companies from bringing jobs to a state with laws like this in place.

Not in every case of course, but it would make California less competitive — something no state can afford with the job market the way it is. In terms of addressing pay disparity, the legislation likely wouldn’t result in CEOs cutting their pay that drastically. Reich’s tax code issue might see more attention and improvement, but companies are unlikely to begin cutting and doling out CEO paychecks to the extent they’d be required in order to escape the potential tax change. What’s more, politicians are unlikely even in the liberal state of California to pass a bill that would anger so many strong business interests.

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