Cap CEO Pay at Ten Times the Lowest-Paid Worker

The average CEO-to-typical-worker compensation ratio at S&P 500 firms was 21:1 in 1965 and 281:1 in 2024 (Economic Policy Institute). Among the 100 S&P 500 firms with the lowest median pay, the average ratio was 632:1 in 2024, with Starbucks at 6,666:1 (Institute for Policy Studies, Executive Excess 2025). The Dodd-Frank pay ratio disclosure rule, in effect since 2018, requires public companies to file the annual CEO-to-median-employee ratio. The Internal Revenue Code caps the corporate deduction for executive compensation at one million dollars under §162(m) but imposes no limit on compensation itself. This policy caps executive compensation at ten times the annual total compensation of a firm’s lowest-paid worker, through amendments to the Internal Revenue Code and the Federal Acquisition Regulation.

What the cap does

No employee of any firm doing business in the United States may receive total annual compensation greater than ten times the annual total compensation of that firm’s lowest-paid worker. Total compensation includes wages, bonuses, employer-paid benefits, stock awards and options valued at grant, and deferred compensation. “Lowest-paid worker” includes all direct employees, subsidiary employees, franchise workers, and contract workers who perform work for the corporation, measured on an annualized full-time-equivalent basis.

Current federal law does not cap executive compensation. Section 162(m) of the Internal Revenue Code denies corporations a tax deduction for compensation above one million dollars paid to covered employees. Section 4960 imposes a twenty-one percent excise tax on compensation above one million dollars paid by tax-exempt organizations. Section 280G imposes excise tax on excess golden parachute payments. Each provision denies a deduction or imposes an excise tax on specified compensation; none caps compensation directly.

Two local jurisdictions impose graduated taxes tied to CEO-to-worker ratios. Portland, Oregon’s Pay Ratio Surtax (effective 2017) adds ten percent to the Business License Tax for publicly traded firms with a CEO-to-median ratio at or above 100:1, and twenty-five percent at 250:1 or above. San Francisco’s Overpaid Executive Tax (Proposition L, effective 2022) adds 0.1 to 0.6 percent to the gross receipts tax, keyed to the same ratio band. Both ordinances use median worker pay as the reference.

Pending federal legislation uses the median-based approach. The Tax Excessive CEO Pay Act of 2025 (S. 2818 / H.R. 5298, 119th Congress) would raise the corporate income tax rate by 0.5 to 5.0 percentage points on firms with CEO-to-median-worker ratios above 50:1. The CEO Accountability and Responsibility Act (H.R. 5019, 119th Congress) would deny preference in federal procurement to firms with ratios above 50:1. Neither uses the lowest-paid worker as the reference point.

The lowest-paid-worker reference differs from the median-based approach in three respects. The denominator is the floor wage rather than the median, so subsidiary, franchise, and part-time workers are included. Reclassification strategies available under median-based rules — spinning off low-wage operations into separate entities, or classifying employees as independent contractors — do not remove those workers from the denominator if the anti-circumvention rule applies. The reference also matches the one used by worker cooperatives that have sustained ratio caps over decades, including Mondragón Corporation.

The statute, tax code amendments, and federal contracting rule

Implementation requires statutory amendments to the Internal Revenue Code and the Federal Acquisition Regulation, together with implementing regulations from Treasury, the IRS, the SEC, and the Federal Acquisition Regulatory Council. The enabling statute authorizes the amendments below and directs those agencies to complete implementing rules within twenty-four months of enactment.

• Amend IRC §162(m) to deny any deduction for compensation paid to any employee of a publicly traded or privately held corporation above ten times the annual total compensation of the corporation’s lowest-paid worker.
• Add a new IRC §4961 imposing a graduated excise tax on compensation above the cap: twenty-five percent on amounts between ten and twenty times the lowest-paid wage; fifty percent between twenty and fifty times; one hundred percent above fifty times. Liability falls on the corporation, not the employee.
• Amend Federal Acquisition Regulation subpart 52.222 to bar contract award to any firm whose highest-paid-to-lowest-paid compensation ratio exceeded 10:1 in any of the preceding three fiscal years.
• Require annual certification of the ratio on IRS Form 1120 and SEC Form 10-K, supported by documentation of the lowest-paid worker’s total compensation, employment classification, and hours.
• Define “lowest-paid worker” to include every direct employee, subsidiary employee, franchise worker, and contract worker providing services to the corporation, measured on an annualized full-time-equivalent basis. Include an anti-circumvention rule barring corporate restructuring whose predominant effect is to move low-wage workers outside the measured workforce.
• Establish a whistleblower bounty of up to thirty percent of recovered penalties for employees or former employees who identify undercounted workers or compensation.
• Phase-in: effective for tax years beginning twenty-four months after enactment. Existing multi-year compensation contracts honored for their remaining stated terms, not to exceed thirty-six months from the effective date.

Precedent

Congress has previously used the Internal Revenue Code to raise the effective cost of specific categories of executive compensation. Section 162(m), enacted in the Omnibus Budget Reconciliation Act of 1993, denies corporate deductions for publicly traded company executive compensation above one million dollars. The Tax Cuts and Jobs Act of 2017 removed the performance-based exception and expanded the category of covered employees. Section 4960, added by the same Act, imposes a twenty-one percent excise tax on compensation above one million dollars paid by tax-exempt organizations. Section 280G imposes excise tax on excess parachute payments.

Portland, Oregon’s Pay Ratio Surtax, adopted in 2016 and effective January 1, 2017, has generated annual revenue at or above the projected $3.5 million. San Francisco’s Overpaid Executive Tax, adopted by Proposition L in November 2020 and effective January 1, 2022, was projected by the City Controller to raise between $60 million and $140 million annually. Neither ordinance has been struck down on constitutional grounds.

Private-sector implementations of the lowest-paid reference include Ben & Jerry’s, which maintained a 5:1 lowest-paid-to-CEO ratio from 1978 to 1994 before raising it to 7:1 and eventually abandoning it after the 2000 Unilever acquisition. Mondragón Corporation, a Spanish worker-owned cooperative federation founded in 1956, maintains ratio caps ranging from 3:1 to 9:1 across member cooperatives, averaging approximately 5:1, decided by worker-owner vote. Mondragón uses the lowest-paid wage in each cooperative as the reference point, the same reference used in this policy at the federal level.

The only national legislative vote on a lowest-paid ratio cap is Switzerland’s 1:12 Initiative, proposed by the youth wing of the Social Democratic Party in 2011 and voted on in November 2013, which would have capped the highest monthly salary at the lowest annual salary. Swiss voters rejected it 65.3 percent to 34.7 percent.

The Economic Policy Institute’s 2024 analysis of the 350 largest publicly traded firms finds average CEO-to-typical-worker compensation at 281:1 (realized). The Institute for Policy Studies’ Executive Excess 2025 report finds that the 100 S&P 500 firms with the lowest median pay averaged a 632:1 CEO-to-worker ratio in 2024, with Starbucks at 6,666:1. Between 1978 and 2024, top CEO compensation rose 1,094 percent while typical worker compensation rose 26 percent.

First 100 days

Day one. Presidential memorandum directs Treasury, the IRS, and the SEC to begin the rulemaking required to support the pay cap, and directs the Federal Acquisition Regulatory Council to issue a notice of proposed rulemaking on FAR subpart 52.222 amendments. The memorandum directs the Office of Management and Budget to publish an initial compliance cost estimate for firms currently operating above the 10:1 threshold.

Day thirty. Treasury and the IRS issue proposed regulations defining “lowest-paid worker,” “total compensation,” and the anti-circumvention rule. The SEC issues a proposed rule updating Form 10-K to require annual disclosure of the highest-to-lowest-paid ratio, separate from the existing §953(b) median ratio disclosure.

Day ninety. The President signs the enabling statute, creating the IRC §162(m) amendments, the new IRC §4961 excise tax, and the FAR authorization, with a twenty-four-month effective date. A companion executive order bars new federal contract awards to firms whose most recent certified ratio exceeds 10:1, with a limited waiver available for national security procurement.

Effect of the cap

Firms seeking to increase executive compensation must raise compensation across the full workforce, including subsidiary, franchise, and contract workers covered by the anti-circumvention rule. Compensation above the 10:1 threshold is non-deductible and subject to the graduated excise tax, so the effective cost of above-cap compensation rises with each excise-tax tier. Firms above the threshold are ineligible for federal contract award under the amended Federal Acquisition Regulation. The anti-circumvention rule prevents reclassification of low-wage workers out of the denominator through subsidiary structuring or contractor designation.