Paying the Boss 1,000 Times More Than a Worker Encourages Reckless Corporate Behavior

Back in the 1960s and into the 1970s, few American corporate chief executives pocketed more than 40 or 50 times what they paid their workers. That divide looks quaint by today's standards, but back then business analysts like the famed Peter Drucker considered even those gaps much too wide.

Drucker called for CEO-worker pay ratios no wider than 20 to 1 or 25 to 1. Average Americans today, according to Harvard Business School researchers, consider an even narrower margin -- no more than 7 to 1 -- to be ideal.

The contrast between public sentiment and our current reality could hardly be starker.

A new Institute for Policy Studies report reveals that at the 50 publicly traded U.S. corporations with the widest pay gaps in 2018, the typical employee would have to work at least 1,000 years -- an entire millennium -- to earn what their CEO made in just one year.

Among America's 500 largest publicly traded corporations, nearly 80% paid their CEO over 100 times what their median worker was paid in 2018. More than a quarter had gaps of 300 to 1 or wider.

Across the country, public outrage is driving support for policies to crack down on such obscenely large pay disparities. Just this week, presidential candidate Bernie Sanders released a plan for a federal pay gap tax.

The idea has been percolating around the state and local levels for years.

Portland, Ore., recently became the first U.S. jurisdiction to make companies pay consequences for extreme pay gaps. Last year, Portland began collecting revenue from a tax penalty on companies with CEO-median worker pay ratios of more than 100 to 1.

San Francisco voters will find a proposal for a similar tax on their March 2020 ballots. And policy makers in seven state legislatures have introduced similar proposals.

Some analysts consider the problem of runaway CEO pay just a concern for shareholders. But it's a more fundamental problem than that: Skyrocketing CEO pay levels incentivize reckless executive decision-making like the kind that caused the 2008 financial crisis.

Congress recognized this in 2010 when it passed the Dodd-Frank financial reform law after the crash. That law included several CEO pay provisions, including a requirement that publicly held U.S. corporations annually disclose the ratio of CEO pay to median worker pay. The SEC finalized the disclosure regulation in 2015, and corporations began reporting their ratios last year.

Imposing tax penalties on companies with extreme gaps would do much more to discourage the kind of irresponsible behavior that led not only to the crash, but to other widespread social harm -- from the opioid crisis to climate change.

Tax penalties on extreme CEO-worker pay gaps would also build on the living-wage movement by encouraging corporations to lift up the bottom and bring down the top of their wage scales. The more corporations shovel into executives' pockets, the less they have for workers' wages and other investments.

Like other "sin taxes," these penalties would both discourage harmful practices while generating revenue for social needs. The new Institute for Policy Studies report finds that S&P 500 SPX, +0.02% corporations as a whole would have owed as much as $17.2 billion more in 2018 federal taxes if they were subject to tax penalties ranging from 1 percentage point on pay ratios over 100 to 1 to 5 percentage points on ratios above 500 to 1.

Walmart WMT, -0.63% , with a pay gap of 1,076 to 1, would have owed as much as $794 million in extra federal taxes in 2018 with this penalty in place. With those millions, the federal government could have extended food stamp benefits to more than 520,000 people for an entire year.

Marathon Petroleum MPC, +0.26% , with a 714-to-1 gap, would have owed an extra $228 million, more than enough to provide annual heating assistance for 126,000 low-income people.

Legislators at the city, state, and federal levels should consider policies to make corporations pay for big pay gaps. These extreme disparities harm all of us. And we've waited too long for corporations to fix the problem on their own.