Corporate Balance

Institute checks on the size of corporations and/or executive pay.  Use progressive taxation to make extreme corporate bloat unprofitable.

The Problem

Corporate growth and executive compensation are currently out of control.

Everyone hates Mega-Mart

In the latter half of the twentieth century the corporate landscape has become dominated by large corporations at the cost of smaller companies.  Some communities have gone to great lengths to ban the construction of new stores.  But when these stores are built the economies of scale available to the parent corporations are too good to resist, people go to the stores in droves and the local outlets are unable to compete and go out of business.

Mega-Mart is not a specific business, but a placeholder for a lot of large corporations.  When reading what follows, go ahead and substitute the one that you hate the most.  Go ahead, we won't tell!

Before Mega-Mart comes to town, people run their own businesses and sell to each other.  Prices are higher because the owners of the small businesses are not as efficient as Mega-Mart, but the small business owners have money to raise their families and they are part of their community.

After Mega-Mart comes to town, the same people work as employees instead of owners.  They may do essentially the same job, but usually for less money and no equity.  There is no business to pass down to son or daughter, and in many cases the products are produced overseas without the worker protections we take for granted in the U.S.

Why don't people just boycott Mega-Mart? Some do, but it's hard.  For one thing, the prices are always so low, it's hard to justify paying more.  Then there's the "all in one" aspect of many of the stores, which makes the shopping experience so much more efficient.  And after a while there just aren't any alternatives because they've gone out of business.

Where does all the money go?  As with any company, the money goes to the owners.  It funnels to the top, and the larger the corporation the more money there is to be split between the various owners.

The last election focused on Main Street vs. Wall Street.  Mega-Mart is all about Wall Street, but most of us live on Main Street.

S/he Gets Paid What?

Hardly a week goes by without one hearing of a monster compensation package enjoyed by a CEO of some major corporation.  The general reactions to this include shock, awe, horror, but mostly disbelief.  We can almost understand the baseball or football player who gets a multi-year package in the tens of millions, we can see them every week and measure their contribution to the team.  The corporate executives are invisible until they do something stupid, after which they still get a golden parachute, often worth more than many of us will make in a lifetime.

It is reasonable and just that hard work and expertise should be well compensated.  An executive who saves a multi-national corporation a lot of money should get a bonus.  But over and over we hear of compensation packages that are three orders of magnitude larger than pay given to common workers.  It is hard to think of this as reasonable and just.

The pain point seems to be this ratio between the highest paid and the lowest paid.  If a janitor makes minimum wage, should the CEO make $150 million a year?  Minimum wage works out to something in the neighborhood of $15 thousand a year, the ratio is therefore 1 : 10,000, a whopping four orders of magnitude.

It's not just any single corporation, however.  This type of inequity is now spread over our entire country.  Our middle class is disappearing into the wealthiest few and a growing cycle of poverty.  This is by far the most obvious characteristic of a third world country: nothing but princes and paupers.

Checks and Balances

The founding fathers used the concept of checks and balances as a way to structure the government so that the part could not become more powerful than the whole.  It should be possible to apply something similar to corporations so that they, and their principle owners and officers, do not grow out of control in wealth and power.  The natural mechanism for this seems to me to be taxation.

I present two constraints that might server this purpose:

• progressive taxation based on relative size of corporation and
• progressive taxation based on officer/employee compensation ratio.

It amuses me to think of these presented as a choice, much as today the government allows some corporations to chooose between cash and accrual accounting.  Then again, given human nature and recent events, it may be necessary to use both.

Growth Indexed Taxation

Within a given industry, the larger the corporation the higher the tax rate.  Growth would be regulated by taxes.

The main result of this would be to favor smaller corporations.  As corporations grow in size compared to their competition they are forced to pay higher tax rates, making growth a liability at some point.  Small business would have a natural advantage, making more folk into owners and CEOs and increasing social mobility.

The nation as a whole might lose some level of efficiency.  Economies of scale would be lost in some cases.  Then again, if scaling up the business is really so much cheaper, the additional taxation required would be balanced out.

Compensation Indexed Taxation

Corporate taxes would be based on the ratio of the highest paid officer(s) to the lowest paid employee(s).  The higher the disparity, the higher the tax rate.

This would place a penalty on corporations that compensated their officers too highly.  When the board of directors considers paying $20 million a year to a CEO and that kicks up the corporation's tax bracket, the board is likely to re-think the number.

Note that this constraint can be changed on either end.  If the corporation's tax level is too high, the board can either cut executive pay, increase worker pay, or both.

In a way, this resembles salary caps currently in use by sports teams.  If there were no caps then rich teams would simply hire the best talent and always win.  Sure, that's the way most business runs, but for sports franchises it would be way less interesting for the spectator if there wasn't some sort of balance.

Small Business

Small businesses are arguably the engine that drive our economy.  They create more jobs, increase wealth in the middle class, and represent the Norman Rockwell view of Main Street we all want to preserve.

Therefore it is important that we not damage small businesses, and neither of these proposals do so.  Small businesses won't run afoul of growth indexed taxation, and most small businesses won't achieve a high enough compensation ratio to be hurt by compensation indexed taxation.  In short, small business would fall under the radar.

In the case of growth indexed taxation the small business would benefit.  As Mega-Mart is taxed more it becomes less competitive, and/or its board elects to restrict growth to remain competitive.  In either case Frank's Pharmacy benefits.

Preserving Choice

One aspect of these proposals is that they are all about choice.  Mega-Mart can elect to grow and pay extra taxes.  Other corporations can elect high levels of compensation to attract the best and the brightest, paying extra taxes to do so.

Neither of these proposals removes choice from the equation, they just changes the rules of the game to achieve balance.  Taxation is a time-honored way to guide behavior without direct legislation and restriction.