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Maximum Wage Law Passes Congress

Salary Caps Will Help Stabilize Economy

By J.K. Malone
Published: July 4th, 2009

WASHINGTON — After long and often bitter debate, Congress has passed legislation, fiercely fought for by labor and progressive groups, that will limit top salaries to fifteen times the minimum wage. Tying the bill to a plan of overall reform of the U.S. economy, the bill echoes a similar effort enacted by President Franklin Roosevelt in 1942, which was followed by the longest period of growth for the middle class in U.S. history.

“When C.E.O. salaries remain stable thanks to high taxation of high salaries, there’s little incentive to take big risks with shareholders’ money, and the economy remains in a steady growth mode,” said Senator Barney Frank, one of the bill’s co-sponsors. “But when C.E.O. salaries can fly through the roof, there’s a very strong incentive for C.E.O.s to rake in massive dividends, often at the cost of the company’s, and the country’s, stability.”

The first time the U.S. implemented a maximum wage was in 1942, when President Roosevelt said that “no American citizen ought to have an income, after he has paid his taxes, of more than $25,000 a year,” the equivalent of $315,000 today.

Some version of a maximum wage law was in effect until 1980. Before 1964, income over $400,000 in today’s dollars faced a 91 percent federal tax rate, and the top-bracket tax rate never dipped below 70%. Under Reagan, the top tax rate slid down to 28 percent — a shift that is now understood to have been one of the prime contributors to the mortgage meltdown and other market failures.

The current minimum wage is $5.85 ($12,168 annually) making the new maximum wage $182,520/year. Any amount over that will be taxed at a rate of 100 percent.

The Center on Executive Compensation is an industry-backed group based in Washington whose goal is to tell corporate America’s side of the executive pay story. Richard Floersch, the center’s chairman and the chief human resources officer at McDonald’s, defended high salaries. Most companies, he said, are “dedicated to a very strong executive compensation program with very strong principles around pay for performance.”

In the two days since Mr. Floersch made these comments to a reporter, the Center on Executive Compensation has dissolved. A statement on their website now reads: “We have decided that in light of recent changes in economic policy, and the failure of hedge fund managers and banks to prevent massive losses despite their astronomical pay, our Center has lost its relevance.” The statement also acknowledges the problems caused by Fannie Mae and Freddie Mac executives falsifying profits of $9 billion so their firms would appear attractive to investors and then, instead of being fired, receiving retirement packages upwards of $10 million.

House Speaker Nancy Pelosi celebrated the bill’s passage with an impassioned speech. “The struggle on behalf of human dignity continues. We need investment in productive enterprises and public services. The era is over of C.E.O.s who receive millions in bonuses as their employees go without health care and the company fails.”

In her speech, Ms. Pelosi extensively quoted Treasury Undersecretary E. Merrick Dodds, who stated, shortly after passage of the first maximum wage under Roosevelt: “The modern period has been one in which a new impulse towards regulation has gathered strength as a result of our experience of the evils to which unlimited freedom of contract gives rise in a postindustrial society characterized by extreme inequalities of wealth and bargaining power and by sudden oscillations between booms and depressions.”