Curbing Executive Compensation: A New Tax Scheme (2013)

In 1916, Henry Ford faced a legal battle with shareholders in Ford Motor Company (including, most notably, the Dodge brothers) over a plan to end the company’s practice of giving special dividends. The Dodge brothers wanted to force the company to continue giving special dividends and Ford wanted to end the practice in order to use the cash to expand operations. Ford, who was the President of the company, said his motivation for this shift was “to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.” While the Michigan Supreme Court would eventually rule against him, Ford’s plan was simple: share the success with workers through higher wages and more hiring, and with customers through less expensive cars which will earn their loyalty and their business. More than ninety-five years later, Howard Schultz, Chief Executive Officer (CEO) of Starbucks, appeared on the Piers Morgan Show and asked American corporations and executives to realize the same principle—that “success is best when it’s shared.” In the same interview, Schultz implored CEOs of American companies to put short-term profits aside and use company funds to invest in the long-term success of their country and their companies, claiming that the private sector “can’t wait for Washington” to act to fix the ailing U.S. economy. Given the state of the economy and the unseemly growth in executive compensation while employee wages and job growth remain stagnant, it is now Washington who cannot wait to act.\nThis Article suggests a first step towards such action ultimately rests on the simple premise that the fruits of any successful endeavor must be shared equitably with those who gave their effort to bring about that success. In this context, equity requires that the profits of large corporate enterprises be shared according to some positive relationship with the risk of loss and the responsibility for success. Working from that premise, it is unacceptable that the profits of large corporate enterprises are currently shared by a few and the losses are spread amongst the many. The chief culprit in bringing about such an unacceptable state of affairs is the unchecked and undisrupted growth of executive compensation. This Article argues that in order to reduce the current inequities of the compensation of executives as compared to employees, Congress should tax the earnings of executives in excess of 100 times that of the average employee at a rate of 90%. Such a tax will help to reduce the grossly disparate inequality of earnings between executives and average employees because executives will either make less money after taxes, will negotiate smaller compensation packages, or average employees will be paid more.\nThe text that follows consists of three main parts. Part I reviews the current executive compensation tax scheme as it relates to executive salaries. Part II then reviews the current executive compensation tax scheme as it relates to non-salary compensations. Part III details the shortcomings of the current executive compensation tax scheme. Part IV then argues that executive compensation should be deemed excessive if it surpasses 100 times the gross yearly wages of the average employee. Additionally, Part IV argues that executive compensation regulation through the tax code is best met by imposing a large individual tax burden on executive compensation. In conclusion, this Article contrasts this proposed legislation scheme by comparing it to the current executive compensation tax scheme.