Forty by Forty

One of the hot topics lately has been the extreme gap between bottom rung and top tier pay in companies. You get people making minimum wage struggling because "there's not enough money for raises" while the top executives have multi-million dollar contracts.

This is not a discussion about whether the executives deserve that pay. That should be something left to the shareholders. This is simply an idea for how to rein in the gap while helping to provide more income for the economy. I call it the Forty by Forty rule, or 40x40 for short.

For discussion, I will be using a minimum yearly wage calculated against federal minimum wage for forty hour work weeks for 52 weeks, rounded off to the nearest thousand. Some states have higher minimum wages.

$7.25/hour * 40 hours/week * 52 weeks = $15080, rounded to $15000

If the company has tipped employees, their rates for 40x40 calculations will be twice their base pay. Federal law mandates that this be a minimum of $2.13 an hour, which would come out to $8860.80 in one year.

Some companies may pay less for young, new hires under the Fair Labor Standards Act, as well as pay less than minimum wage for workers with disabilities, full-time students, and student-learners. These incomes would be calculated at full minimum wage. More information can be found at the Department of Labor's website.

40x40 is an idea for tax laws in handling companies and the tax breaks they may claim based on how they pay their workers. Because I'm not an economist, I would welcome any input from trained sources as to the impact or feasibility of these ideas.

Let's start with the first 40. In order to qualify for federal tax breaks, a company must spend 40% of their profits on payroll. (Naturally, this would be profits before paying their employees, taxes, benefits, and so on.) Using the minimum wage above, this should not be difficult for small businesses to do if they have 4 people working 40-hour weeks or 8 people working 20-hour weeks. A guy running a small restaurant should be able to fit that requirement easily.

For larger companies, this may seem trickier. Take Walmart who reported $15+ billion in earnings for their last fiscal year (if I'm reading that right) as well as other numbers for income, taxes, benefits, etc. We'll give it a nice hardy $25 billion for pre-payroll profit. Right off, you'll notice that's a difference of $10 billion, or 40% which seems a bit outlandish. Bear with me, a lot of this is hypothetical to begin with and I'm not exactly proficient at reading their annual report which can be found here. The numbers for paying employees and benefits seem to be on page 45 of the PDF.

Anyway, we've established that the 40% itself should not be too difficult. This leads in to the second 40. The highest income cannot be more than 40 times the lowest income. So if the lowest paid employee makes $15000 a year, the highest paid employee cannot be paid more than $600000 or the tax breaks are forfeit. What about stock options and benefits? The yearly income would be calculated based on how the person is being hired and paid.

Take your hourly wage earner. We'll start off with $15000.

• Add to that certain benefits that are available by the first paycheck that can have a defined value for which the employee does not have to pay.
• Subtract all benefits that the employee must pay that are provided by a third party.
• Do not include benefits that the employee must wait to use or cannot be solidly defined.
• For these purposes, bonuses and awards are not included.

Let's use the restaurant. The guy offers a health insurance plan which he pays half of and the employee pays the other half. He provides one meal and free drinks (for argument's sake, we'll say this cost him $10 per day) and after you work for one year, you get 3 days paid vacation. Since he pays half and the employee pays half of the insurance, they essentially cancel each other out for calculating yearly income. Because the vacation time cannot be used at hire, those 3 days don't get added in either. However, the meals get added in at $10/day * 5 days/week * 52 weeks a year = $2600 dollars. So the employee is considered to be paid $17600 per year for the purposes of 10x10. That means the highest wage that could be earned in the whole company (which is likely just the manager) would be $704000 per year.

There's a catch though: the health insurance. Many people who get health insurance are told they cannot use it for the first 4 weeks or 30 days after they start paying. This would make it a benefit that is not immediately available. Therefore, the employer's contribution would not count towards the 40x40 totals. As such, the employee's total would be less. For a small business, this should not really be that big of an issue. Say the payment is $80 a week split between the employer and employee. The employee's total would still come out to $15520.

Now, let's switch this over to the salary side. For this discussion, anyone's who pay is determined at least by the month will be considered salaried for determining 40x40 values. If they show you being paid by the hour, you're not salaried.

• Add to that all benefits that are available that can have a defined value for which the employee does not have to pay.
• Subtract all benefits that the employee must pay that are provided by a third party.
• Do not include benefits that cannot be solidly defined.
• For these purposes, bonuses and awards are included.

The big thing that might be looked at are stock options. "They don't have a solid definition." Yes they do. They have a value at the time of award. If a person is award 20 options at $20 each, that's $400, regardless of their value when the option is exercised.

Because salaried individuals are hired with a guarantee of benefits and pay, those that are not available immediately are still part of the salaried deal. In our above example of $704000 a year, health insurance the the employer and employee split would cancel each other out. If he's hired with a bonus of stock options, that should count against his total.

Now, imagine a Walmart executive making only $704000 cash a year. Imagine any executive making only that much. If that was broken down to 40-hour work weeks, that'd be about $338.46 an hour. 1 hour of work and they'd still be making more than a minimum wage earner after 40 hours.

Don't get me wrong, I'm not saying all executives don't earn their pay. For some, they're considered on the clock 24/7. Others are given the task of rebuilding a business going through difficult times. But it really puts things in perspective as to how much they earn compared to those lower on the totem pole.

And that's the catch to it all. If executives want a raise, they just need to raise the rate of pay for their lowest paid workers. It doesn't even have to be cash, though that would help people more. Benefits can be added that make the value of their paycheck more. Take the health insurance, for example. A company could take on the whole insurance payment and the employee's income would be considered boosted by another $2080. That means the big shots could give themselves a $80000 pay raise and still be in compliance with the 40x40. What's more, this is an extra $40 a week the employee puts in their pocket. That's like a $1/hour raise.

It wouldn't be out of the question to tax on the 40x40 calculated income either. This way the government doesn't lose out on their revenue.

So, what about businesses that say screw it and ignore the 40x40? They're not penalized. They're just not allowed to claim certain tax breaks. This could be a wide range of select breaks that would make a company more profitable or a simple, straight percentage. It could even be taxing the company on their pre-payroll profits if they don't comply, meaning a larger amount of taxes paid.

That said, this is only guess work. Numbers may have to be fiddled with to make them more viable for businesses as a whole. I looked at what I thought were opposite ends of the business spectrum. Perhaps I'm not factoring in something or unaware of other things, but it has a good feel to it. I invite anyone to chime in with their opinion or information relevant to this. Have fun!