California companies pouring big cash on their CEOs may be forced to tighten the spigot under a new bill that seeks to limit CEOs paid excessively at the expense of their workers.
Senate Bill 1372, authored by state Sens. Mark DeSaulnier (D-Concord) and Loni Hancock (D-Oakland), would increase taxes on companies with wide disparities between CEO and worker pay, and give a tax break to companies with a low ratio between CEO and worker pay.
“History has taught us that the gross disparity between CEO and worker pay is a direct threat to American democracy,” DeSaulnier said in a press statement. “It is unsustainable and a danger to our society. We must focus on restoring the middle class and stop fueling excessive income inequality.”
The pay-disparity bill cleared the Senate and Governance Finance Committee last Friday, and is headed to the Senate Appropriations Committee.
Local tech companies have much reason to fear the bill. Larry Ellison, CEO of the Redwood City-based Oracle, was paid 1,287 times the median salary of an Oracle employee in 2012, according to a Bloomberg study. Ellison pulled in $96.2 million in 2012, and the median employee working for his company brought in $74,693.
That’s less pay gap, more pay canyon. Former Secretary of Labor Robert Reich, a professor at UC Berkeley and a supporter of the pay-disparity bill, connected CEO pay with our troubled economy.
“This growing divergence between CEO pay and that of the typical American worker isn’t just wildly unfair. It’s also bad for the economy,” Reich wrote on his website last week. “It means most workers these days lack the purchasing power to buy what the economy is capable of producing — contributing to the slowest recovery on record. Meanwhile, CEOs and other top executives use their fortunes to fuel speculative booms followed by busts.”
The pay-disparity bill would lower taxes on companies with CEOs making less than 100 times more than its median employee. The tax rate for the company would be metered on a scale of CEO-to-worker pay ratio, with the highest penalties for companies paying their CEOs more than 400 times their median employee pay.
The bill also targets non-salaried independent contractors, a significant portion of the state's workers.
Many local companies have wide pay gaps between CEOs and workers. In 2012, Apple had a CEO:worker pay ratio of 192:1, Wells Fargo had a ratio of 186:1, and Intel squeaked by with a ratio of 99:1, according to PayScale.com.
The PayScale.com study only looked at non-stock compensation. CEOs are often paid in stock and other bonuses, a significant part of their earnings. In lieu of this, recently many CEOs jumped on the $1 salary bandwagon, including Google CEO Larry Page. Ellison took home a single dollar for his salary in 2013, according to CNN Money.
This seemingly forward-thinking gesture is a good PR move, but in reality CEOs still take home millions of dollars in stocks, options, and bonuses. Page owned more than 24 million shares in Google as of 2013, for instance. Ellison took in $92.2 million in stocks, options, and other pay in 2013.
Luckily, that’s a loophole that DeSaulnier and Hancock considered when crafting the bill.
The bill would calculate executive compensation based on the Summary Compensation Table the company in question reports to the Securities and Exchange Commission. That includes salary, bonus, grants of stock options and stock appreciation rights, long-term incentive plan awards, pension plans, and employment contracts and related arrangements.
In 2012, the average CEO pay in California was $5,054,959, according to a statement from DeSaulnier, while the median worker pay in California was $48,029.