byline: Philip H. Umansky, Ph.D., CPA, Ph.D.

During the plast year, the political class has raised income inequality as an issue either to be embraced as a verification that the United States is not (or should not) be more socialistic, but should stay a primarily capitalistic economy. Superior skill and talent should be rewarded.

Others, however, point to a related issue: the middle class is declining with a big chasm between the upper 1 percent and the lower 99 percent, which is not favorable based upon criterion of equity. CEO pay is a subset of the broader issue of income equality.

So what are the facts related to CEO and employee pay? For 2013, the median pay of a public corporation CEO rose to more than $10 million, according to an Associated Press/Equilar pay study. This is an increase of 50 percent from the depths of the recent Great Recession in 2008 and is 257 times the pay of the average worker now, the highest to date.

One of the criticisms of CEO pay has been the need for a stronger linkage between CEO pay and performance. There have been changes regarding CEO pay, with a greater portion of compensation being in the form of shares of stock with less through stock options and cash. Obviously, the higher the stock price, the greater the compensation of the CEO, and to the extent that stock price reflects the “bottom line” financial performance of the company, there is a stronger linkage.  

As indicated above, criticism of CEO pay is primarily made on the issue of equity and less on performance, talent or productivity. The CEO pool for large public companies is small, and the skills needed to navigate the increasingly competitive business environment — marked by rapid change in such factors as technology, consumer tastes, regulatory requirements and internationalization — require a competitive compensation. In comparison to these highly sought after CEOs, many employees at the bottom of organizations have a limited ability to increase productivity just due to the nature of the job.

Americans preoccupation with inequality of wealth and income, some say class envy, is relatively new and a potent political tool for those on the left. But historically Americans compare their compensation with those within their own socioeconomic reference group or profession as opposed to their CEO. As long as the employee is doing well within his or her reference group, he or she will feel satisfied with their pay. In addition if the economic pie is growing and the employee is “keeping up,” then class envy will be less. It is the job of the CEO to make the pie grow larger for his/her company. To the extent that this occurs, and the employee progresses through increased salaries and promotional opportunities, then envy of the CEO should be lessened. 

Unfortunately, there is a significant skill divide in the United States, with CEOs in general possessing extraordinary business skills, while the public education system is not performing well in equipping workers with even rudimentary entry-level skills that would allow the employee to progress up the corporate hierarchy. According to the Bill & Melinda Gates Foundation, “Only 25 percent of public high school graduates have the skills needed to succeed academically in college, which is an important gateway to economic opportunity in the United States.”

Even if there is a significant redistribution of income, and it is given directly to low-income workers, there is not enough to go around to make an appreciable impact upon their lives and would do nothing to reduce the skill divide (unless it can be used to increase the quality of education.) CEO pay does not need to be reduced as a matter of public policy, but the skill divide does.

 Philip H. Umansky, CPA, Ph.D., is chair of the Department of Accounting and Finance at Virginia Union University in Richmond.

In early July, the Patient Protection and Affordable Care Act (PPACA) “employer mandate” — which requires employers with more than 50 employees to provide health insurance to their employees beginning in 2014 — was delayed by the Obama administration for one year. This is to provide more time for employers to comply with reporting requirements under the new law. The delay will permit those businesses that choose not to provide health insurance next year to escape a penalty of up to $3,000 per employee. The individual mandate, however, will begin in 2014. Employees who would otherwise be covered would then be required to purchase insurance on the “individual” market, through state exchanges, with federal tax credits available for low- to middle-income persons. 

There is an old axiom in economics: “There is no free lunch.” So now a cost that was to be borne in large part by business will be borne by the individual and the federal government through the tax credits for 2014. One wonders if a possible strategy for small business, which opposed the law at the time it was passed, is to delay the mandate, so as to live to fight another day, and therefore lobby to modify the law such that the employer mandate is taken out or substantially revised before 2015, when the mandate would go into effect.   

Certainly, small businesses at the margin of 50 employees can make the best argument. Many small businesses have already indicated that they would put employees on a part-time basis to circumvent the penalty, which is assessed only on full-time employees not offered affordable health insurance by the employer. This is, in effect, a wage decrease, unless the worker finds supplemental work with another employer.   

Businesses could also favor hiring outside independent contractors to get some employees “off the books.” Some small-business owners have even suggested that they will pay the fine for each full-time employee not covered, as this would be cheaper than the health insurance premiums they would need to pay. They would then tell the employee to go the state exchanges to get their own insurance, subsidized by the federal government tax credits. This would make a lot of sense for small businesses that have many low-wage employees who would get the largest tax credits. Many small businesses provide health insurance to attract highly skilled talent and remain competitive in the job market and will continue to do so even absent the mandate. However, there will be a range of small businesses that compete for low-wage, low-skilled employees that may not be able to afford the coverage for these employees.    

PPACA was not bipartisan legislation. It did not receive even one Republican vote in either the House or the Senate. Based upon current surveys, the  law is even more unpopular now than when it was signed into law, and there have been enough bumps in the road already for the argument to be made that it is either unworkable and should be repealed, which is unlikely,  or that major parts of it need to be changed.  Certainly, the U.S. Chamber of Commerce, can make the push, as it has in a published a report in June 2013 entitled  “Health Care Solutions from America's Business Community: The Path Forward for U.S. Health Reform”. This report notes many of the consequences stated above related to the employer mandate.

The big issue addressed through the report is the imprecise knowledge of the cost of health insurance for 2014 and beyond. Because the federal government has defined a set of generous Essential Health Benefits (EHB) as well as other requirements for health insurance policies, their pricing into health insurance cost is unknown and potentially unaffordable for many small businesses if some projections are correct. Small businesses want the flexibility to offer health insurance that they can afford.  At the very least, a phase-in of the requirements is preferred.    

At least 2014 will give small business an opportunity to make its case, perhaps, with the outcome of the 2014 midterm elections as a barometer of success. But if unsuccessful, a longer time frame for assessing costs and workforce requirements, understanding reporting requirements, and gearing up for actual implementation is important and needed, so the delay is welcome news for small business.

Dr. Phil Umansky, CPA is an associate professor of business and department chair of the Accounting and Finance department at the Sydney Lewis School of Business at Virginia Union University in Richmond, where he has taught for 24 years. Dr. Umansky is a member of the Virginia Society of CPA's (VSCPA). Umansky received his doctorate in accounting from VCU and has a master of accountancy degree from Virginia Tech.

 

On Jan. 1, 2013, one of the most immediate fiscal cliff issues, income tax increases for all individuals, were avoided as the Bush-era tax cuts were made permanent for 99 percent of Americans. Taxes will go up for couples with income of $450,000 or more and individuals of $400,000 or more, which will include many small business entities such as S Corporations and Partnerships in which profits flow through to the individual income tax return. Yes, there will be a tax increase for some small businesses, through it will impact fewer small businesses than the $250,000/$200,000 (couple/individuals) level originally favored by President Barack Obama and Congressional Democrats. Every worker, however, will see his or her Social Security tax rate go up from 4.2 percent to 6.2 percent.     

Nothing, however, was done in terms of long-term deficit reduction, which is driven by entitlements such as Social Security, Medicare and Medicaid or fundamental tax reform in which the tax system could be made simpler and more competitive with other nations. As House Minority Whip Steny Hoyer (D-Md.) stated in his speech before the House of Representatives vote, “Compromise is not the art of perfection.” This deal was certainly imperfect, but it was necessary to get to the next step. 

Now the stage is set for a more long-term fiscal cliff debate, which will be in a few short weeks when the federal debt ceiling of $16.4 trillion will need to be increased and the two-month postponement of sequestration will expire. At this point, the real debate will begin — not as to whether the United States should end up like Greece (everyone agrees it should not), but whether our politicians have the courage and ability to make truly difficult choices on a bipartisan basis that will prevent it from happening. Many Americans will remember the summer of 2011, when capital markets gyrated and the U.S. debt was
downgraded.

The trajectory of the long-term debt of the United States can best be described not so much as a fiscal cliff, but a fiscal slide. This trajectory has been problematic for over a decade, but has accelerated over the last four years. As of Sept. 30, 2002, the federal debt was $5.7 trillion. As of Sept. 30, 2008, it was $13.6 trillion, and now the number stands at more than $16 trillion.
Unfortunately, the consequences of such a slide do not become apparent in just one episodic point in time, but are more gradual. In many ways, a gradual slide can engender not so much a sense of complacency, but a lack of immediacy that allows hard decisions to be deferred.
 
So what are the hard decisions and what are the consequences of not making them sooner rather than later? The hard decisions involve which spending to cut and what revenue to generate through taxes, and unlike numbers on a spreadsheet, these decisions impact real people. With many different politicians representing many different competing interest groups, the process is going to be hard and will require bipartisan compromise. 

But these decisions will be harder to make and the consequences greater in the future. The interest expenditure on the federal debt, which goes toward no government program that helps anyone, will increase. What’s more, the interest expenditure will be become even higher once interest rates go up. The other consequence of a long-term burgeoning national debt will be lower long-term economic growth than would otherwise be the case as resources are being shifted from the private economy to the federal government.

A basic framework for long-term deficit reduction is the Simpson-Bowles Commission framework, which can be revisited, at least as a starting point. The election is over, and part of the immediate fiscal cliff has been resolved, so now is the time to focus on long-term deficit reduction.

Phil Umansky, CPA, is an associate professor of business and department chair of the Accounting and Finance department at the Sydney Lewis School of Business at Virginia Union University in Richmond, where he has taught for 24 years. Umansky is a member of the Virginia Society of CPA’s (VSCPA). Umansky received his doctorate in accounting from VCU and has a master of accountancy degree from Virginia Tech.