Home > Personal Finance > A Sweet Solution to the Sticky Wage Disparity Problem

Comments 0 Comments

Thirty-five years ago, a couple of counterculture confectioners in Burlington, Vt., developed a recipe that combined funky, chunky deliciousness, brilliant branding and granola-headed idealism.

I’m talking about Ben Cohen and Jerry Greenfield and their iconoclastic Ben & Jerry’s ice cream company.

But it’s neither Cherry Garcia nor Phish Food that’s on my mind right now—well, maybe just a little—as much as it is the social pact that Messrs. Cohen and Greenfield made with their employees at the start of their venture: From top to bottom, the pay ratio between the highest salaried executive and lowest-earning-worker would be no greater than 5 to 1.

To their credit, the ice cream kings kept to their pay scale deal for 16 years. At that point, Cohen was set to retire and no successor who was willing to accept B&J’s compensation compact could be found.

End of an Era

So the bar was raised to 7 to 1 to attract new talent, and ultimately to 17 to 1 over the course of a half dozen years more. The company was then acquired by Unilever USA in 2000, after which the corporate cone of silence descended on what was once a very transparent practice.

These days, executive compensation is very much in the news, as the difference between the lowest-paid hourly workers and the most senior corporate executives has grown to an epic proportion. In fact, I heard one economist describe the nature of the wage disparity that exists in this country as the envy of corporate CEOs around the world.

Whether Ben and Jerry’s socially responsible policies were the result of youthful exuberance or entirely too much Bonnaroo Buzz one night, they unambiguously communicated a set of corporate values that resonated with the company’s employees, customers, suppliers, lenders and investors. Said differently, the founders’ actions favorably influenced the views of those but for whom their company would not have been in business in the first place.

Public perception plays a big part in shaping those opinions—a sensibility that owners and leaders of smaller, privately held companies instinctively understand, and their larger-corporate contemporaries choose to ignore. After all, their executive-compensation packages are usually a function of financial performance; financial performance is derived from expense control, and expense control is achieved through wage suppression and grudging investments.

In other words, executive compensation has evolved in a way that Adam Smith could not have contemplated when he put forth his theory on the “invisible hand” of self-interest that was supposed to guide society to new heights.

But what today’s conspicuously consumptive chieftains fail to recognize—and those of us who’ve actually signed payroll checks know from experience—is that relentless cost control is a strategy without a future. That’s because at some point, belly and abdominal fat give way to muscles, organs and bones. Consequently, the ideal that investors hold dear—consistent earnings growth—becomes a thing of the past.

A More Sustainable Model?

And what of the plight of those most at risk—employees who live paycheck to paycheck? Is suppressing their upward mobility an effective way to increase productivity or, for that matter, the purchasing power on which our consumer-driven economy depends?

I don’t think so.

That’s why, as important as transforming the minimum wage into a living wage may be, there’s even more that should be done to encourage a return to sensible (and sustainable) compensation practices—without layering on cumbersome legislation.

Recently, President Obama extended a carrot, of sorts, by offering to reduce the corporate tax rate in exchange for increased spending to promote job growth. Frankly, I’d rather see that reduction in rate tied to shrinking wage disparities. But first, another quick trip in Peabody’s WABAC Machine.

Twenty years ago, the IRS adopted a change in the tax code that was intended to discourage excessive executive remuneration. Section 162(m) limited the tax-deductibility of non-performance-based compensation to $1 million for executives of publicly traded corporations.

Focus on the term, non-performance-based compensation. That means straight salary, and it created a loophole through which a substantial transfer of wealth has easily passed. In fact, according to a study by the Economic Policy Institute, the implicit exemption for performance-based compensation (i.e., incentive programs linked to specific achievement metrics) cost the government approximately $30 billion in lost revenues between 2007 and 2010. At current tax rates, that translates into upward of $85 billion that changed hands during those three years.

So here’s an idea: Why not close this loophole by subjecting a higher level of total executive compensation—performance and non-performance-based earnings for public and private company executives alike—to a rational phasing out of its tax deductibility? And why not use those new-found revenues to offset the cost of a reduction in overall tax rates that would be aligned with targeted ratio improvements between the highest- and lowest-earning employees?

The idea is perfectly consistent with contemporary political, flavor-of-the-month thinking: “It has to be revenue neutral!”  Who knows, the legislation could even become a brand-new Ben & Jerry’s flavor.

Any suggestions? Weigh in in our comments section below.

This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.

Image: iStockphoto

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team