A Sweet Solution to the Sticky Wage Disparity Problem

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