Rhode Island Senate Considering “Maximum Wage” Legislation

The Rhode Island Senate’s Finance Committee is considering Senate Bill 2796. If you live in Rhode Island, or have friends or family that are state residents, I strongly urge you to have them write or call their state senator in support of the legislation.

Here’s the key provision of the bill. It would amend Chapter 37-2 of the General Laws entitled “State Purchases.” It would incorporate a new section 37-2-81, “Selection of vendors and services based on economic security and pay equality.” Section 37-2-81 empowers and directs the head of the department of administration to establish rules and regulations that give priority in contract and/or subcontract awards to business enterprises whose best-paid executive receives compensation and/or salary equal to thirty-two times or less than the compensation and/or salary paid to its lowest-paid full-time employee.

I’ll be the first to admit that this legislation needs to be tightened, since companies could escape the force of the bill by turning low-pay full-time employees into part-time staffers or turing the worst paid “employees” into contractors. But this is an extremely promising start, and people who call the legislature to support the bill can urge that this loophole be closed.

Doug Smith, one of the founders of the heterodox economics association, Econ4, has been a vocal advocate of the maximum wage concept. From his testimony to the Rhode Island Senate’s finance committee:

Like the rest of the nation, Rhode Island currently faces a crisis of income and wealth inequality. Between 1979 and 2007, the top 1% of Rhode Islanders captured 32.6% of total income growth in the state.

For comparison purposes, the 32.6% that has gone to Rhode Island’s top 1% is dramatically higher than the 23.6 percent of income going to the top 1% of Rhode Islanders in 1928 – on the eve of the Great Depression.

Rhode Island’s economy, also like the rest of the nation, is substantially consumer-driven – two-thirds or more of any growth comes when people buy goods and services. The top 1% in Rhode Island have ample money for spending. But studies – and common sense — indicate that the super wealthy do not devote as high a percentage of their income to consumption as do the bottom 99%. For Rhode Island’s economy to have any chance whatsoever of real recovery and growth, at least one imperative stands out: The state must get more money in the pockets of the 99%.

Unfortunately, as Rhode Island Treasurer Gina Raimondo has detailed, this imperative is not being met. Average Rhode Islanders are losing ground:

• 63% of Rhode Islanders say they have difficulty covering expenses and paying bills, and only 38% have emergency funds set aside.

• Nearly one in ten Rhode Islanders has had to take out a loan or hardship withdrawal from a retirement account in the past year.

• Rhode Island has the nation’s third highest state average for personal credit card debt.

• The volume of Rhode Island payday lending doubled between 2008 and 2011, to $70 million.

• 22% of Rhode Islanders with mortgages have missed at least one mortgage payment.

Put differently, Rhode Island’s economic security is in jeopardy.

By providing state contracting and sub-contracting preferences to business enterprises whose executives earn no more than thirty-two times those enterprises’ lowest-paid workers, SB2796 incentivizes businesses seeking government contracts to change the ratio of top-to-bottom pay through some blend of reducing top executive pay and increasing the pay of other employees.

A lower top-to-bottom ratio increases Rhode Island’s economic security in several ways:

• Increases in employee pay translate immediately into more consumer spending, reduced household debt, and investments in education and other economy-supporting assets

• Decreases in top executive pay translate into some combination of higher pay for other employees, more jobs, and more earnings that, in turn, mean higher tax revenues for Rhode Island, higher dividends for shareholders, and higher retained earnings for investment in business growth and more jobs

SB2796 actually does even more for a healthier, happier, and more sustainable Rhode Island than these outcomes suggest. The legislation promotes sound business practice that, in turn, produces greater business productivity and success.

I have spent more than thirty years working as a consultant with businesses in over fifty different industries. I have seen at first hand the deleterious effects on business productivity that inevitably arise when top executives earn hundreds of times the pay going to other employees.

This dangerous rise in top-to-bottom pay ratios fuels a cancerous spread of business strategies obsessed with cost reductions and short-term financial performance. The result: outsourcing, offshoring, tax avoidance, downsizing, and the substitution of good-paying permanent jobs with temporary, precarious employment.

Smith made the general case for a maximum wage in a 2011 post, using a 25-to-one pay ratio as his model:

We face severe and growing income inequality with negative effects on people and the economy. Yet, no surprise, the ‘can’t do’ right wing continues a scorched earth campaign against the minimum wage. These self-promoting haters actually prefer no wages and indentured servitude – for example using prisoners to replace employees and cheerfully promoting ‘internships’ for the unemployed…

But people who seek to shrink income inequality — to insure life, liberty and the pursuit of happiness for all and not just some — must now focus as much on the maximum wage as the minimum wage.

So, be it proposed:

“That any enterprise receiving taxpayer funds shall not compensate that enterprise’s highest paid person in an amount greater than twenty-five times what the lowest compensated person receives.”

First, note that this proposal would not apply to enterprises that do not receive any taxpayer funds.

For those, however, receiving bailouts, deposit insurance, government guarantees, tax breaks, tax credits, other forms of public financing, government contracts of any sort – and so on – the top paid person cannot receive more than twenty-five times the bottom paid person. This ratio, by the way, is what business visionary Peter Drucker recommended as most effective for organization performance as well as society. It also echoes Jim Collins who, in his book Good To Great, found that the most effective top leaders are paid more modestly than unsuccessful ones. And, critically, it is a ratio that is in line with various European and other nations that have dramatically lower income inequality than the United States.

Note, second, that this identifies the top paid person – not the CEO. Even though outrageous CEO pay and its ill effects on severe income inequality is much in the news, CEOs are not always the highest paid person.

Third, the proposal uses a ratio – 25-to-1 – instead of an absolute dollar figure. If a taxpayer funded enterprise wishes to pay the top person, say, $50 million, they can do so: just as long as the lowest paid person receives $2 million. In other words, instead of today’s limitless top wage being supported by taxpayer money – that is, socialism for the rich and only the rich — this proposal is equitable toward all.

Fourth, the choice of compensation is made by the enterprise – not by government officials.

Fifth, this approach to the maximum wage dramatically benefits the economy through some blend of more job-creating investment by the enterprise (through deploying higher retained earnings), and/or more consumer spending, savings and investment because of increased take home pay (and/or shareholder dividends) for the many instead of the few. It would, for example, immediately provide stimulus to restart our heavily consumer-driven economy.

Sixth, this proposal is competitively neutral: all enterprises using taxpayer funds must abide by the same 25-to-1 ratio of top-to-bottom compensation. In most industries, competitors respond to opportunities similarly; that is, if there are government opportunities, all try to take them and, if there are no such arrangements, none do…

Nor, seventh, would this proposal have any adverse effect on the market for talent. Again, all enterprises are subject to the same rules. Moreover, there’s never been any – zero, zilch, nada – evidence that top pay correlates with sustained enterprise performance. Indeed, quite the reverse…The more likely result is the opposite: the maximum wage ratio will put enterprises using taxpayer funds on a better, sounder path to performance than those who don’t use taxpayer funds!!….

Eighth, this proposal can and should be enacted by all federal, state and local jurisdictions that provide taxpayer funds to enterprise. And, of course, with the appropriate inclusive definitions of ‘compensation’ (salary, wages, bonuses etc) and “person’ to avoid cheating and evasion…

It is the free choice of free enterprise whether or not to use OUR MONEY. If you are part of an enterprise and wish to pay anyone, including yourself, more than today’s all-too typical extreme, greater than 300 times the lowest wage earner, go ahead.

But do not use OUR MONEY.

As various commentators have pointed out, the Administration’s proposal to raise minimum wages would benefit only a small number of workers. Proposals like Seattle’s plan to raise the minimum wage to $15 an hour is an important step towards recognizing the need for workers to be paid a minimum wage. It is an important step forward for those at the very bottom, but it won’t dent income inequality, which has corrosive effects on society long term. By contrast, with the great advances of socialism for the rich via direct and indirect subsidies to business, the notion of a maximum wage has great potential leverage. I hope you’ll support this initiative.