transparency Archives - Bankers Anonymous

December 11, 2019December 11, 2019

Transparency Part III – Salaries! All We Have To Lose Is Our Chains!

Ready for another crazy, but great, money idea that could change your life for the better?

Salary transparency. At your workplace. Meaning: everyone knows what everyone else gets paid, every year. No, wait, stick with me here. I know you suddenly felt a little ill. But salary transparency works to your advantage.

Salary transparency is an idea most commonly discussed as an ideal in recent years among Silicon Valley tech companies, but it shouldn’t begin or end there.

San Antonio-based software engineer Nancy Hawa of DevResults a data-organization and data-visualization company based in Washington DC, pushed for salary transparency in her 12-person company earlier this year. DevResults decided to take the plunge.

As a result, her CEO and COO released to employees a completely open set of data around not only what all employees make this year, but the entire history of everyone’s compensation.

The initial feeling among Hawa and her colleagues with that disclosure, she admits, was dismay. She described the higher-paid employees in the office holding their heads at their desks in a kind of awkward embarrassment. Lower-paid employees, like Hawa, held their breath to find out what would happen next.

To the credit of DevResults’ leadership, they announced that despite what appeared to be “unfair pay” then, nobody would be paid less as a result. Over time, Hawa reports, lower-paid employees received a bump up in pay to put them in line with their colleagues. Transparency for Hawa meant she will be paid a lot more, not only this year, but in the future.

I learned from my conversation with Hawa a bunch of the nuances around salary transparency, a topic about which she is passionate.

The first nuance is about the “Why?” of salary disclosure.

The two best reasons to want financial transparency are to fight corruption and to ensure fairness.

I wrote earlier about income tax transparency, which is mostly about fighting corruption, and somewhat less about fairness.

Salary transparency is an even more radical departure from current norms than tax transparency. I’m increasingly convinced good business leaders should institute it as a matter of setting company culture.

Now, before you all freak out, salary transparency actually is somewhat normal in certain circumstances. As Hawa notes, “The State of Texas is not a progressive or radical organization, but they decided they needed salary transparency.”

Texas believes strongly in salary transparency as a public policy value, presumably for both anti-corruption and fairness reasons. I did an experiment, moments ago, to answer the question of how long it would take me to figure out Texas Governor Greg Abbott’s annual salary. The answer, in my case: 46 seconds. He makes $153,750 per year.

But immediately, I realized the next important nuance about transparency.

Partial Transparency

One of Hawa’s main warnings is that ‘partial’ salary transparency is actually destructive. With ‘partial’ disclosure she points out, you move quickly from no salary information to salary misinformation.

For example, an online search would tell you that Texas legislators earn $7,200 per year. But that number totally overlooks the generous pensions they can accrue over years of service, as I wrote about earlier in the year. So ‘salary transparency’ can be done well, but it can also be done badly.

It took me 41 seconds to find that my wife has part of her salary disclosed online as well, as she is paid part-time by a State of Texas entity. That partial disclosure, however, is misleading because it’s only part of the story. Again, partial disclosure can obscure rather than illuminate.

Hawa also cited companies that release “salary bands” rather than all salary data. All that does is potentially hide big differences in total compensation within wide ranges, like $40,000 differences, as she has observed elsewhere. Also, releasing general information about characteristics of employees, like “new hires receive $X in salary, but with some exceptions” can actually deceive.

Why the exceptions? And why the non-identifiable descriptions? Selective disclosure, Hawa argues, is often worse than no disclosure at all, because it misleads.

I wondered if only a relatively “flat” organization would want to radical transparency. Hawa doesn’t think so. Companies should be free to pay for star performance, as long as management can justify it.

“The company doesn’t have to aspire to flatness, but does have to aspire to fairness,” says Hawa. “Unequal is not the same as inequitable.” Those seem to me important points as well. Pay as much as you want or need to, as long as you wouldn’t be embarrassed by everyone knowing everyone’s pay.

If you’re a business owner who would be embarrassed by full salary transparency at your firm, what does that say about your method of paying folks? In an important sense, Hawa believes, the discomfort is the point. Hawa described her colleagues’ initial discomfort as a positive rather than a negative.

From Hawa’s perspective, transparency challenges leadership to be introspective. That’s where the hard conversations, and maybe some learning, can begin.

Says Hawa, “If you are leader, give yourself the opportunity to be challenged by your employees. If your salaries are fair, you’re good. If they are not, you [the manager/owner] have something to learn.”

Who Benefits from Opacity?

I’m pretty interested in the thought experiment. This all got me thinking about the fact that salary transparency is really not considered ‘normal’ in most workplaces. But why? Why are we unwilling to be transparent? What are we uncomfortable with? Who benefits from the secrecy?

For competitive reasons, we can all agree it makes sense not to publish your data to your competitors. But to ensure fairness within your own organization, wouldn’t full disclosure for current employees reduce mistrust?

I asked Hawa if she thought disclosure helped managers run her business better.

“I think there’s a business value in taking this off of people’s minds.”

And if you are a worker at an organization and the idea of salary transparency makes you uncomfortable, you should probably realize that secrecy isn’t your friend. You might have some initial shock and resentment upon disclosure, sure, but after that you would likely benefit. Secrecy is a tool in the hands of management.

As Siskel and Ebert once said: All You Have To Lose Are Your Chains

I think if you’re a worker worried about salary disclosure, you should remember the words written by a couple of German guys who became famous in 1848: All you have to lose are your chains!

A version of this post previously ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

Tax Transparency – I’m a fan

City Economic Development Transparency – SA and Houston failing grades

San Antonio and Houston need transparency taken to 11

TX Legislative Salary transparency and opaqueness

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October 25, 2019December 11, 2019

Transparency Part II – TOTAL Tax Transparency

I’ve been reading up on “tax transparency” lately and have become a convert to the idea. The idea is that the IRS could and should publish online, in a searchable database, the annual income and income taxes paid by all taxpayers.

I’ve got political, economic, and sociological reasons for my conversion.

You probably already anticipate the political. Most Democratic presidential candidates this month have rushed to release a decade’s worth of their personal tax returns. They do this in part to contrast with President Trump, who has broken with forty years of tradition by not releasing his own tax returns. His stated reason is that his returns are “under audit” with the IRS. An audit process, however, does not prevent voluntary disclosure, according to the IRS itself.

But there is a better way. You’re going to love this idea.

If you’ve ever read my columns before, you probably realize that when I say “You’re going to love this,” I actually mean that you’ll probably hate this.

Let’s not limit ourselves to begging for voluntary disclosure by a president, or presidential contenders. Let’s get it all out there. For everyone. That was the rule back in 1924. The IRS made public the amount of taxes paid by every individual and corporation. I say we reinstitute that rule, which was unfortunately repealed in 1926.

What happens when you disclose everyone’s income and taxes paid publically?

A primary goal of income and tax transparency is to deter tax evasion, especially by powerful people. A secondary goal is to increase the amount of taxes paid. A tertiary goal is that we get to address important issues like wage inequality.

A paper published in February 2019 by the National Bureau of Economic Research describes Pakistan’s recent experience with tax disclosure.

In Pakistan, the government began in 2012 to publish how much both elected officials and citizens earned in income and paid in taxes.

This has direct relevance to the current United States situation, since the program began as a result of press reports that elected officials had not been paying their taxes.

What better way to ensure compliance and trust in the system than 100% exposure of all citizens’ income and taxes paid? Sunlight, as they say, is a great disinfectant.

In Pakistan, two free searchable directories are published in PDF form online each year. The first is income earned and taxes paid by all members of Parliament. The second directory has the same tax information on all taxpayers, searchable by name.

One hoped-for effect with this program is to encourage whistleblowers to come forward if they suspect someone, like a political rival or a neighbor, of not paying their fair share of taxes.

As a result of this program, among members of parliament in Pakistan, tax compliance moved from 30% to 90% within the first year of the program – an extremely dramatic jump. I feel like this kind of effect on public officials of tax transparency should be a requirement in a democracy.

For an entire society, individuals would be less likely to attempt illegal tax avoidance, or even plausibly legal but overly aggressive attempts to reduce taxes, if they knew others would be watching. Other taxpayers may enjoy the “bragging rights” afforded by high reported income and high tax compliance, possibly helping bring in additional revenue.

Norway has a strong tradition of tax transparency, dating to the 19^th Century. Beginning in 2001, the central government began to publish all taxpayer wages and taxes paid online, searchable by anyone

A Norwegian study from 2014 found that business owners’ reported income increased by 3% on average following the change to total transparency, with a 0.2% bump in taxes collected. Higher reported income leads to higher taxes paid. An equivalent jump in taxes in the US would raise $3.2 billion. The effect is larger on business incomes rather than salaried incomes because of the extra wiggle room that businesses enjoy to report and pay taxes, when compared to W2-type earnings that are independently reported.

Norway_earth_porn — Norway: Earth Porn and Tax Porn! Photo credit : TORE MEEK/AFP/Getty Images)

Pakistan and Norway are not the only countries to experiment with tax transparency. Italy tried it in 2008, posting all tax returns from 2005 online, before taking down the information, following protests.

Greece and New Zealand use public exposure of tax evaders to encourage compliance.

This tax transparency may all sound radical, but we already have a small version of this in the United States. And life goes on. I just mean the fact that I can look up property taxes owed and paid by almost anyone who lives near me through a simple internet search of county records.

Academic studies do acknowledge some downsides to transparency. Some consider this an invasion of privacy. We could easily imagine some embarrassment or even harassment about one’s level of income.

Apparently in Norway, the well-known practice of “tax porn” internet searches – looking up people’s income for voyeuristic purposes – actually makes people unhappier in some instances.

As a result, since 2013 in Norway, the subject of a tax search is informed of who is doing the searching. This has led to a drop from 16.5 million searches to 2.15 million searches in the year after implementation of the rule change, all on a population of 5 million.

When I am declared benevolent dictator of this fair land, I will look to institute tax transparency similar to what they have now in Norway and Pakistan – an easy internet search of anyone’s net worth, taxes owed, and taxes paid. A moderate charge for each search would make it a revenue generator for my government’s coffers. The moderate charge would also limit “tax porn” searches and encourage tax compliance.

One additional benefit of this proposed database would be to equalize pay. Efficient markets, including markets for work, depend on the free flow of information. Pay information, however, is often obscured and secret. A 2010 economics paper found that disclosure of income not only mattered to lower-income people, but prompted them to take action, such as look for higher paid work. Under my tax transparency regime, people would have the information to make their arguments for better pay and equality.

Finally, Joel Slemrod, the University of Michigan economist who co-authored both papers on tax transparency in Norway and Pakistan, also published a paper in 2015 with the intriguing title “Sexing Up Tax Administration.”

Let me know if you need a synopsis of that one in an upcoming post.

Please see related post

Transparency Part I – Legislative Salaries

Transparency Part III – Salaries

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October 21, 2019December 11, 2019

Transparency part I – Texas Legislator Pay

I have a civics quiz for Texans: Do you know what your state representative or senator gets paid?

If you answered with the official $7,200 salary per year — only five states pay less — you only get partial credit.

If you added in the $190 per diem for 140 days while the Lege is in session every other year — which can add up to $13,300 per year — you’re getting warmer.

TX_capitol_building — TX Capitol Building

To find the real answer, you have to understand the fine print of their pensions, following retirement from the Legislature.

We’ll get to all that, but first, let’s acknowledge their pay is too low.

The five states with lower legislator salaries than Texas — New Mexico, New Hampshire, South Dakota, Vermont and Wyoming — have tiny populations. Houston and its surrounding suburbs have a higher population than those five states combined. In terms of budgetary power and economic decision-making by the Legislature, the low salary of Texas lawmakers makes little sense.

We all seem to be getting a deep discount on Texas legislators. I don’t think that’s a good thing.

When you systematically underpay, you often get one of two results, or both. Either you attract only wealthy people for the job — not a perfect result — or you attract people seeking to take financial advantage of their position — an even worse result. I think people should be paid fairly, in a straightforward way.

The lack of straightforwardness is the real problem in Texas.

So now we have to dig a bit deeper into how lawmakers get paid by unpacking the myth, the Texas Constitution and the reality.

Myth

First, the myth. This probably derives from some Jeffersonian ideal in which the gentleman rancher unbuckles his spurs, wipes the mud off his boots, and joins the august and deliberative bodies in Austin for four months every two years. In that world, which no longer exists — if it ever did, which it probably didn’t — pay is irrelevant to that rancher who derives his true living from the rich soil on the banks of the Brazos.

Texas_rancher — What TX Legislators would like you to picture: The Gentleman Rancher-Legislator

Second, and more important, the Texas Constitution clearly states that pay raises for legislators must go to a public vote. Strategically speaking, lawmakers avoid making themselves an easy target for cranky Texans wanting to vote their displeasure with Big Gummint. As a result, lawmakers’ salaries stay low to avoid the risk of a public spanking.

Third, and here’s the real point, legislators are often paid quite generously, just in a roundabout, somewhat-hidden-from-voters kind of way.

You see, their real compensation is in the friends they make and the heartwarming lessons they learn along the way. Just kidding — that’s the moral of my imaginary children’s novel.

The Reality

Their real compensation is their pension, which is tied to the salary of state district judges, currently $140,000.

To be more specific, legislators qualify for guaranteed annual pension payments of 2.3 percent of $140,000 for every year served. They can also accrue years of service in other state pension systems, as well as for military service.

So, for example, eight years in the Legislature qualifies a retired state lawmaker for a guaranteed pension of $25,760 per year for life, starting at age 60. A 60-year-old woman has an average of 24.5 years of life remaining. By making some assumptions, including a 3 percent discount rate, a finance guy like me calculates that guaranteed annuity is today worth $436,259.

The financial deal is better if the legislator starts serving at an earlier age and retires earlier as well.

A 50-year-old man with 12 years of service in the Legislature could retire with a guaranteed $38,640 per year. Because, again, that’s 2.3 percent times $140,000 times 12. With a life expectancy of 29.6 years and a 3 percent discount rate, the 50-year-old former lawmaker could receive payments over the next 29 years with a present value of $816,534.

These aren’t outrageous windfalls, and I’m not saying it’s undeserved pay. But it’s not nothing, either. It’s fair pay — just paid after retirement rather than during service in the Legislature.

The ingenuity of tying retirement pay to state district judge pay is twofold. If legislators want to give themselves a pay raise in retirement, they just raise the salaries of judges, which they did in 2013 when they bumped them to $140,000 from $125,000. Second, that pay raise doesn’t have to go in front of Texas voters as the constitution mandates. Sneaky!

My main objection is that we end up with a myth of the citizen/legislator, without acknowledging this is a full-time job that requires full-time pay. Also, we should be able to look at a salary and understand what folks are actually paid.

In my view, the system isn’t necessarily overly generous — it’s just opaque. Opacity serves legislators well but the public poorly.Finally, since my kids go to public schools and public school teachers always go begging for more funds, I have a bomb-throwing legislative proposal for this session: Instead of tying legislator pensions to state district judge pay, we should tie their pensions to teachers’ salaries. Can we all take a moment to imagine what would happen?

This post previously ran in the San Antonio Express News and Houston Chronicle.

Please see related posts:

Transparency Part II – Income Taxes

Transparency part III – Salary Transparency

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June 17, 2017

Failing Transparency Scores for Houston and San Antonio

Let’s say it’s Friday night, 11:30pm. You stayed in to Netflix and Chill with Bae. But then you bolt upright in bed, wide awake because, like, “Exactly what kind of tax abatements DID my city give out to attract that out-of-state manufacturing company, anyway? And also, how many jobs does my city expect and what’s the average salary for those new jobs?” Darn it, now there will be no sleeping for hours.

I’m being a bit flippant but now please forgive me if I go too far the other way. The Washington Post’s new adopted tagline captures, at least for me, why citizens need to be able to see economic development subsidies whenever the question occurs to us. Because “Democracy Dies In Darkness.” You have to be able to follow the money. We should all be sleepless if we can’t figure out which private companies enjoy our public subsidies, because the opportunity for mischief is too great.

If you live in San Antonio and Houston, you need to wait weeks, at least, to get answers to your subsidy question, if you even know how to request them, which you probably don’t. If you live in Austin, however, you’d have answers on your laptop by approximately 11:34pm, through their online searchable database. Then you can fall right back to sleep.

In March 2017 a think-tank named Good Jobs First published an excellent report titled “Show Us The Local Subsidies” grading the country’s 50 largest cities on the quality of their economic development program disclosures for subsidies like tax abatements. Meaning, if somebody wants to know which private companies received city or county tax breaks or investments, this report described how a citizen could, or could not, access that information on the web. The report included the largest Texas cities and counties, and the results were quite mixed.

Austin scored 95 and 90 points out of 100 for two of its programs, best in class. Fort Worth earned an underwhelming 50 and 55, Houston scored a middling 45, and Dallas County a 30. Other Texas governments scored zeros for web-based disclosure – include the City of San Antonio and Bexar County (San Antonio), City of Dallas, City of El Paso, Harris County (Houston), and Tarrant County (Fort Worth). To be clear, these scores do not indicate anything about the effectiveness of their economic development subsidies, but rather how easy it is for someone to get data online on the economic development deals cut by governments for private companies.

Scoring zero means that specific information about tax abatements for private companies is not available, at all, on the web. For the purposes of the Good Jobs First report, a perfect score requires not only that information be online, but that it be conveniently searchable through a database, including the value and type of subsidy, the private recipient’s name, the date of the subsidy, and the estimated number of jobs to be affected, including average expected salaries. In addition, a perfect score would require multiple years of data for comparative purposes.

David Marquez, Executive Director of Economic Development for Bexar County, takes exception with the report’s characterization of his program as not transparent. He points out that his office is in the habit of sending a spreadsheet of information whenever a reporter requests it.

“It’s the accessibility, not so much the transparency,” says Marquez. “It’s clearly not hidden. That’s not the case. There’s a nuance there.”

Gwen Tillotson, Deputy Director of Economic Development for the City of Houston, notes that all tax abatements awarded under a program called Chapter 380 agreements are posted online in PDF format, usually between 40 and 70 pages of text. In addition, she notes, public meetings notes are posted on a separate website, but “if somebody wanted to go deeper, people could contact us, and we could help them.” Her office also told me that once a year they send a report to the Houston Chronicle on all the subsidies they awarded throughout the year.

Rene Dominguez, Director of Economic Development for the City of San Antonio, also assured me that once a year his office sends a spreadsheet of his office’s transactions to the San Antonio Express News. His office also responds to requests from the public, as needed.

What has worked as a minimum standard of public disclosure in past years, however, is shifting.

Aiding the positive trend toward transparency, this year – for the first time – the Government Accounting Standard Board Rule 77 (GASB 77 for you cool kids) requires cities and counties to disclose the total amount of subsidies and tax abatements awarded to private companies for economic development. Although disclosure is voluntary and does not name individual beneficiaries, nor does it need to be detailed beyond a single total number, a failure to disclose could affect pesky things like bonds ratings and official annual financial audits.

The State of Texas, through the office of Comptroller Glenn Hegar, instituted a “Transparency Stars” program last year to encourage best practices in local government financial reporting, specifically including economic development programs. The comptroller’s criteria for a star closely resemble Good Jobs First’s requirements, including disclosure of data over multiple years, and data visualization. Local governments may apply to the Comptroller’s office for a review and eligibility for a star. So far five cities in Texas have earned a star in economic development.

Says San Antonio’s Dominguez, “I think we as a city strive to be a leader in transparency. Transparency in economic development has become a critical issue,

GASB 77 is a clear example of that, and we’re going to provide additional disclosures. That’s meant to increase transparency.”

Although all of the officials I spoke with expressed a sympathetic interest in greater disclosure, a zero score (San Antonio and Bexar) or even a 45 out of 100 (Houston) is not a good look. I’m throwing down the gauntlet now because I hope to call everyone back in 2018 to congratulate them that they all scored at the top of next year’s Good Jobs First report.

Please see related post:

We deserve more transparency on economic development programs – Part 2

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