A Simple Proposal

Sometimes a proposal comes along that is so simple you say to yourself, ‘Why didn’t I think of that?’ That’s what I said when reading ICTU’s ‘Economic Outlook: Narrowing the Pay Gap’. The highlight of this comprehensive review of the economy is its discussion of the growing pay gap between the upper echelons of corporate Ireland and the rest of us – and a series of specific but far-reaching proposals. This issue of economic inequality should be treated as ‘gateway’ issue – that is, an issue which can lead the Left out of its policy isolation, into territory it can call its own.

And it’s all based on a terribly simple idea – ending taxpayer subsidies to millionaire salaries.

Corporate pay is becoming a bit of an issue. In the US, top executive pay has risen from 33 times the average employee pay in 1980 to 350 times in 2005. American executives are paid astronomical sums – with William McGuire of United Health pulling down a cool $1 billion a year, while Stephen Scwarzman of the Blackstone Group received $4.8 billion in shares from the company on its IPO in 2007.

Concern is not limited to some Leftist ghetto. The business news organisation Bloomberg published a poll showing that 80% of Americans believe CEO pay is too high. And Fortune magazine – the bible of the thorough capitalist - nailed the issue in an article entitled, ‘What were they Smoking?’

'A pack of the highest paid executives on the planet, lauded as the best minds in business and backed by cadres of maths whizzes and computer geeks, managed to lose billions of dollars on exotic instruments built on shaking foundations.'

While more socially-minded Europe doesn’t reach such stratospheric corporate pay levels, the pay-gap is widening. In the UK, the gap between executive salary and average employee earnings is only 98 times (only), but it has trebled since 1980. In Germany the issue is coming to the fore – especially in the wake of the Lichtenstein tax scandals.

In Ireland the pay-gap is not nearly as wide as in the US, but it is substantial and growing. The average pay of the top 10 corporate executives is nearly 57 times that of the average weekly pay in the private sector. But this is not the full picture. For corporate executives are not only paid salaries: they also receive bonuses, share options, generous pensions etc.

Five AIB corporate executives received an average base salary of €559,000 per year. On top of that, however, they received average bonuses of €955,000. Add to that share options which are difficult to value, and you have one heck of a gravy train.

The Irish Management Institute’s annual Executive Salary report is another source of information on corporate pay:

• 67% of Irish chief executives were in line for a bonus of up to 30% of their salary in 2006. This compares to 60% in 2005.
• Managers at head of function level not only received pay rises of 9.3% (almost twice the level of the Towards 2016 pay increases), 59% received bonuses of up to a fifth of their salary, while one-in-eight received bonuses of over a third of their salary.
• 40% of middle management received a bonus of up to 15% of their salary.

But what’s noteworthy is that the biggest increases occurred among management of SMEs (the small and medium enterprise sector which ISME is always claiming are being squeezed by increasing wages). Over the last decade, SME managers averaged pay increases nearly 50% above that of average industrial earnings.

But all this probably understates the problem – and not just because companies with an excessive pay, bonus and share-option regimes for their management would be slow to answer the IMI survey. ICTU shows that there are a growing number of companies moving from limited status to unlimited status. This change of status means that companies don’t have to provide financial information- not just profit levels but executive remuneration.

ICTU lists a number of companies who use unlimited status to hide their financial information and executive pay: the Bernard McNamara group, Cosgrave Property Developments, developer Seán Dunne, Keelings, Cregagh Investment Company, etc. The number of companies with such status has increased by over six-fold since 2002.

So we have runaway incomes and wealth, and a legal status to effectively hide it. What can be done? ICTU’s proposal is simplicity itself:

Abolish taxpayers’ subsidies to excessive corporate salaries.

Companies are, of course, allowed to deduct labour and salary costs – including PRSI and pension costs – from tax. These form part of operating costs, not the gross profit. ICTU proposes that when salaries rise above a certain level the company should not be allowed to deduct the excess amount from tax.

They give an example: when an executive earns more than 15 times the average industrial wage (or approximately €500,000 per year), the excess amount cannot be deducted. This €500,000 would be inclusive of both salary and bonus.

So if Diageo insists on paying their CEO €3.7 million, this one salary payment alone will cost them €737,750 in higher tax payments. In fact, for companies employing the ten highest paid CEOs, their tax bills would rise by €3.3 million. AIB’s five corporate executives referred to above would cost the bank an extra €1.3 million in tax liability.

No doubt corporate lobbyists would attack the proposals - claiming that they undermine companies’ ability to attract the most skilled managers. But that assumes executive pay is subject to the ‘laws of the market’, which they are not. Otherwise, how can we explain the golden parachutes executives receive after being such dismal failures? Chuck Prince, CEO of Merrill Lynch who received a payout of $27 million after his company lost $7.9 billion; or Stan O’Neal, head of Citigroup which lost $9.8 billion – he got a $48 million thank-you payment when he left; and let’s not forget ol’ Hank McKinnell of Pfizer – company shares plummeted by 40% on his watch and he got a golden handshake of $200 million. In the Soviet command economy, managers who didn’t hit their production targets were exiled to Siberia. Under capitalism failures can become multi-millionaires.

Another criticism would be that such an anti-corporate policy would drive away US foreign direct investment. But hey, whoa, this is exactly what happens in the US. It is based on Section 162(m) of the U.S. Internal Revenue Code which stipulates that once executive salaries exceed $1 million a year, the company cannot deduct the excess from tax. And considering that in many EU countries similar proposals are being put forward (in Germany the SPD is proposing a cap on executive pay), the focus on excessive pay is becoming more mainstream.

Will this solve the issue of the widening pay and income gap in society? No. But then no single measure will do that. Targeting excessive corporate pay should be part of a complex of egalitarian measures. However, there is considerable political benefit to be gained by focussing on this particular issue:

• It raises the general issue of income equality
• It focuses on actual incomes rather than Gini abstractions
• It focuses not on a tax rate but rather on a tax subsidy - something that the poorest old age pensioner or disabled person is required to pay
• And it could prepare the ground for arguing for higher taxation on those sectors which are literally rolling in it.

It could provide a gateway to a much wider economic critique whereby, according to the Sunday Times Rich List, the wealthiest 20 people in Ireland have a combined wealth of nearly €25 billion – which is about 15% of Ireland's entire national wealth (or, as Bank of Ireland Private Banking stated – 40% of all wealth is controlled by 5% of the population).

Labour leader, Eamon Gilmore, raised the issue in a speech before the SIPTU Executive:

'The question of equality has been to the fore of late, in discussion of the two recent benchmarking reports, which, taken together, proposed substantial pay increases for those who already enjoy large salaries and little or nothing for those on lower wages. The effect of these reports is to translate trends towards more unequal private sector pay into the public sector.'

Too true. So here’s another simple proposal: Labour should publish a private members’ bill incorporating ICTU’s proposal. Or, like the agency workers’ motion, it could do it jointly with Sinn Fein. It could be called something sexy like the ‘Stop Taxpayer Subsidies to Millionaire Wages Bill’.

But more importantly, it could conduct a major campaign on the issue, treating it like an election campaign – with leaflets, posters, speeches, parliamentary questions, balloons, stickers, complimentary pens: the whole shebang. An entire month could be given over to the issue of excessive pay, incomes and wealth. And given that we are being lectured about wage moderation, public service cutbacks and ‘tightening our belt’ – such a campaign would strike a resonance with a public whose living standards are coming under increasing attack.

The private members bill could go further to include a number of other measures (taxing non-domiciles, putting a ceiling on pension investment, capping annual bonuses at, say, 20% of base salary, requiring full financial disclosure of all companies operating in Ireland – including executive remuneration). And all this could be without once mentioning the dreaded ‘T’ word associated with increasing tax rates. Focusing public attention on the subsidies to corporate high-flyers moves the debate away from the sometimes confusing issue of tax rates and thresholds and reliefs, to the issue of equality, economic equality and economic democracy.

So that’s the proposal – simple. Here’s a campaign – with a simple message. Sometimes it’s a mistake to over-think these issues. When you boil it all down economics is all about ‘who makes how much’. There’s a lot of people who don’t make much. But there’s a few who do – in bucket loads.

That’s the bullseye.

Comments

[Tomaltach]

This is a topic which I have been following for some time. I'm delighted to see it addressed here. You are right this has become an issue in the US of late, and also in France. I have had several letters published on this issue in the indo. Anyway, some of the points I usually make are:

First, boards, and of course CEOs themselves, justify this rise by arguing that top talent is crucial in managing huge companies in a complex business environment. Yet no hard evidence has been marshalled to show that excellent managers are harder to find now than they were twenty years ago. In any case, managers now 'grow up' in an environment where change and complexity are all around them, so they are no less prepared for the challenges of top jobs than were their predecessors a generation ago.

Second. Of course the current orthodoxy is that private business = good, creates value, dynamic. Public sector = bad, universally wasteful, inert. But something narrower still is at work. The idolisation of senior executives as risk-taking, innovative, smart, strong, and even sexy. The cult of celebrity, therefore, has made it to business as well. Such and such a CEO is no longer merely a successful business leader, he or she is a "personality".

Finally, In theory, shareholder value is paramount in the private sector and executive remuneration is set by boards at levels which deliver optimum value for the shareholder. In reality, however, that is often not the case. Even in a big country like the US, studies show that executives and directors come from the same pool with frequent crossover between the two. In truth, very often the shareholder comes second. Besides, why would boards rein in executive pay, since many of them are executives or were executives or will be executivees again.

[Joe Holt]

Nicely presented easy to read article. I'm convinced. In the same vein, I have always argued that decisions on judges, TD's and higher civil servants salarys should take place at the same time as national wage talks. That way big business economists have to argue for "pay restraint" and the need to "retain top people" at the same time - much more difficult for them than at present when they can spin one story today and a totally different story in six months timw

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[Pavement Trauma]

When you say "Companies are, of course, allowed to deduct labour and salary costs – including PRSI and pension costs – from tax. "
do you mean Corporation Tax?

Because, if so, CT is 12.5% so it is hard to see how €737,750 extra tax would be paid on the €3.2 million excess over the €500K limit you propose. The extra 12.5% cost would probably not make most companies pause too much for thought.

Of the other proposals you mention:
1) taxing non-domiciles: fair enough
2) putting a ceiling on pension investment - there already is one.
3) capping annual bonuses at, say, 20% of base salary: Eh, no. What does it matter if someone gets a high salary or a high bonus?
3) requiring full financial disclosure of all companies operating in Ireland – including executive remuneration: Yes, absolutely. I thought the (brief) Italian exercise in publishing everyone's tax return was brilliant.

[Connor O'Jack]

Restrict bonuses to 20%? Sheer genius! And once the last company has left the IFSC and moved to some non-quasi Communist country, SIPTU can have a fantastic campus for Jack's Trade Union University.

[Michael]

Tomaltach - can you forward me your letters or the dates in the Indo when they were published. Would like to have a read of them.

Thanks for the comment, Joe. The thing is that decisions on judges pay, etc. are taken at the national pay talks - and they get the same rise as the rest of us. BUT: they get another bite at the cherry, if you will, with benchmarking. This is to ensure that public sector workers maintain pay relativities with the private sector. However, as we saw, the only relativity that went up - private or public - was for those at the top end. There is a story here which I hope to address soon.

Yes, Pavement Trauma, you caught that one. Well spotted. I miscalculated the interaction between corporate tax rate and PRSI payments. Let me correct my error - the increase in liability for the excess €3.2 million would be €400,000 (salary against CT) and €42,800 (PRSI payments against CT). I'm glad that there are some readers who really study all these numbers I throw out.

Thanks, Connor O' Jack, for the comment. I certainly wouldn't want the IFSC to go empty. After all, multi-nationals are the only thing keeping our economy afloat. But having ceded that, I'm sure you would agree that lone parents, old age pensioners, the disabled, the low-paid - never mind us ordinary average paid working types - shouldn't have to subsidise mega salaries and bonuses through tax write offs.

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