The intelligentsia is duly concerned with the rising disparity of executive compensation in the United States and western capitalist democracies and supports expensive public company disclosure requirements to report executive versus median worker wage differences as a hopeful nudge to contain executive compensation (September 2013 SEC rule on comparative pay disclosure). As James Surowiecki wrote in October issue of New Yorker, ‘In 1965, C.E.O.s at big companies earned, on average, about twenty times as much as their typical employee. These days, C.E.O.s earn about two hundred and seventy times as much (New Yorker story ‘Open Season’ on executive compensation). He argues that peer-benchmarking executive compensation leads to an arms race where public company boards outdo each other to increase executive compensation while losing sight of their workers. Further, he argues board executive compensation committees are outsourcing executive compensation to specialized firms, which only exacerbates the problem and shields boards from accountability. These facts are all true, but they completely miss the most important social objective: we must allow workers to generate more wealth from their labor so they can become rich, society reduces income inequality, and government receives more taxable wealth from a broader population of contributors: win-win-win.
Market forces will determine cash compensation and benefits from the C-Suite to entry level workers. Products and services will be either over-priced and uncompetitive or companies will become unprofitable and discontinue business if wages and benefits are not competitive with peers. The maximum amount of taxable income results from capital being deployed as efficiently as possible in the highest quality, lowest cost source of production. It’s obvious local, state, and federal governments benefit most when private businesses and their workers generate taxable income and capital gains. Public policy, therefore, must not only reward work and capital investment; it must make sure every worker has a boat in the rising tide of prosperity! The ‘boat’ happens to be man’s most natural right: ownership in the fruits of our labor free from outside expropriation. When any life form is born, they have two inalienable natural rights: 1) the right to make their own decisions and 2) the right to eat what they kill or grow, or keep what they earn.
How do we make sure every worker has a boat? Simple: Instead of taxing wealth and having elected representatives redistribute wealth, public policy needs to reward enlightened investors and management teams to share economic ownership and/or expand retirement accounts so workers think, act, and are rewarded just like shareholders in their own business. In short, we know people in close physical proximity in a small community with a common interest will cooperate out of enlightened self-interest. Unfortunately, the historical Darwinian ‘survival of the fittest’ cycle of capital-labor-capital exploitation, which is natural in a free market system, has allowed more nimble and powerful capital to beat labor at every turn. Decimated communities in the industrial Midwest and Europe as manufacturing investment moved to lower costs of production in the South or foreign countries is a sad testament to natural market forces. Those primary wealth-creating manufacturing jobs that generate powerful community ripple effects on service industries and real estate are lost perhaps for generations. What if labor had taken a long-term view and agreed to negotiate for an ownership stake in our manufacturing industries instead of higher wages and first dollar coverage health care benefits over the last 100 years? They could have aligned their cost of production on an ongoing basis with the required pricing to generate maximum return for all shareholders including themselves. They would have had a greater prospect of saving their jobs, becoming wealthy, retiring free of government dependence, and living in safe, prosperous communities. What if public policy rewarded capital and management more to share ownership with their own workers than to pay taxes to government on capital gains? Would that have changed their investment and compensation decisions? I think so. Unfortunately, labor focused on natural near-term economic remedies using democratic power and unionization efforts. They had every right to negotiate fair working conditions and compensation. However, they won the battle, but lost the overall war for sustainable prosperity in their community that capital-labor cooperation can solve.
What is the specific game plan? My Proposed Solution: Work details the solution. The high level summary:
1. Eliminate capital gains tax for stock sales to employee stock ownership programs (ESOP) or for investment in any business owned 20% or greater by non-founder, non-officer employees. Why pay a 20% national capital gains tax when that wealth should be transferred to workers who act like shareholders and are motivated to preserve their local jobs and communities?
2. 100% tax-deductibility on ESOP principal and interest. Dollar for dollar tax credit on ESOP interest if growth of ESOP taxable income exceeds ESOP interest expense. In other words, all ESOPs to borrow interest free if their share of corporate income growth exceeds the interest cost. They are literally paying their own way to prosperity, good for all citizens. We need to reward and cherish it. I would also allow companies to loan employees <50% of the money to exercise and hold stock options in order to reward 12+ month holding period to achieve lower capital gains rates. The stock would be the loan collateral just like a mortgage.
3. Treat all stock options as ‘Qualifying Stock Options’. This means workers only have a taxable event when they sell their exercised options rather than today under Non-Qualifying Options when they have a taxable event on the exercise date. NISOs do not reward long-term employee ownership and give companies a massive tax deduction for a non-cash expense (a form of corporate welfare). By eliminating employer tax deductibility of non-cash option exercise expense, employers will have much higher taxable income. And government can lower US corporate income tax rates to make the United States a more competitive place to do business and invest than our worthy competitors whose income tax rates are far lower than ours. OECD Comparative Corporate Income Tax Rates .
I guarantee you America would have an ‘Ownership Revolution’ if our government were bold enough to focus on raising the bottom not chopping down the top. Companies would be outcompeting each other to attract and reward employees to think and behave like shareholders. Ownership programs would become a competitive hiring advantage. Bringing workers to shareholder meetings to discuss wealth creation year to year would be a celebrated event in the company and community. Bringing worker representatives to management meetings to candidly discuss wage/benefit costs on investment decisions would generate trust and teamwork over time.
It’s all good and right!