Corporate Balance

The Problem

Corporate growth and executive compensation in the U.S. are currently out of control.

Terminology

  • Mega-Mart
    Not a specific business, a placeholder for a lot of large corporations (e.g. Walmart).
  • comes to town
    Not specific to geography, includes large corporations on the Web (e.g. Amazon). 

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.

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 inefficient small businesses can no longer compete. The small business owners end up working 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 descendants, 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. After a while there just aren't any alternatives because the smaller stores have 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. For public corporations some of the money is distributed to stockholders, but most stock is owned by a wealthy minority.
            
Most elections are focused on Main Street vs. Wall Street. Real political power is based in cold hard cash, which is concentrated in Mega-Mart. Mega-Mart is all about Wall Street, but most of us live on Main Street.

C-Suite Compensation

Officers of major corporations -- the C-Suite -- typically enjoy massive compensation packages. Articles about compensation hit the media on a regular basis. Readers are momentarily stunned but the news cycle moves on. We're all used to it at this point.

There is no argument that successful corporate executives are necessary and in many cases very valuable. Most of us could not run a large corporation any more than we could win a professional sports game, perform a hit song, or star in a major motion picture. Talent is hard to find in any context.

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 workers. It is hard to think of this as reasonable and just.

It's not just any single corporation, however. This type of inequity is now spread over our entire country. Our middle class is disappearing as wealth collects into the bank accounts of the richest few. In the end there will be nothing but princes and paupers.

Achieving Balance

Legislating changes to corporate size or executive compensation isn't likely as it would be viewed by many as socialism if not (gasp!) communism. Taxation, however, is used in many situations where legislation would be inappropriate.

Two constraints that might server this purpose:
  • Progressive taxation based on relative size of corporations.
  • Progressive taxation based on officer/employee compensation ratio.
Presenting corporations with a choice would be similar to our current system where corporations are allowed to choose between cash and accrual accounting. Then again, given human nature (i.e. greed) 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 companies. As corporations grow in size compared to their competition they would be forced to pay higher tax rates, making growth a liability at some point. Small business would have a natural advantage over Mega-Mart, making more folk into owners 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 worker(s). The higher the disparity, the higher the tax rate. This would need to include compensation in the form of stock and "golden parachutes."

This would place a penalty on corporations that compensated their officers too highly. When the board of directors considers paying so much money to a CEO that the corporation's tax bracket is increased 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 our cherished view of Main Street.

It is therefore 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.
            
As Mega-Mart is taxed more it becomes less profitable, and/or its board elects to restrict growth to remain profits. As executive compensation at Mega-Mart becomes too high it is taxed more and that compensation must be cut or workers paid more. In either case Frank's Pharmacy benefits (even Frank must close his business and become an employee).

Preserving Choice

One aspect of these proposals is that they provide 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. Or corporations can elect to remain smaller and provide less compensation to avail themselves of lower tax rates.

Owners

Note that none of this affects owners who start corporations and end up owning large amounts of stock or in the case of proprietary ownership the entire company. Family businesses remain family businesses. Building a company is still a path to wealth.

Location: Bellevue, WA 98008, USA

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