Executive Pay

Should Uncle Sam Be Helping CEOs Get Richer?

America’s overpaid corporate execs have plenty of people to thank for their good fortune. But America’s taxpayers — the source of the subsidies that keep excessive CEO pay flowing — are still waiting for some small sign of gratitude.

By Sam Pizzigati

The just-released latest edition of the annual CEO pay report from the Institute for Policy Studies and United for a Fair Economy tells two stories. The first will likely remind most Americans why they get so angry about CEO pay. The second will get them even angrier.

The first of these two stories doesn’t take long to tell. Last year, the new Executive Excess 2008 report notes, top CEOs in the United States continued to pocket outlandishly large paychecks, $10.5 million on average. That’s 344 times the pay of an average U.S. worker — and ten times the pay gap that existed 30 years ago.

The second story takes a bit more explaining: Our tax dollars are actually subsidizing this incredible excess. The federal government, through the tax code, is directly rewarding companies that overpay their top executives.

Executive Excess 2008 details five of these direct subsidies. Two involve rather arcane accounting conventions that corporations exploit to both cheat Uncle Sam at tax time and pump up their quarterly earnings. But the other three don’t require a CPA to decipher.

Many Americans, for instance, already have experience with the concept of “deferred pay” — through 401(k) plans. If you have a 401(k), you can have part of your income deferred from taxes. But you can only defer a limited amount — usually just $15,500 a year — and if the investments where you put that money go sour, you’re out of luck.

Top executives, by contrast, get to have deferred pay plans with no limits whatsoever. They can defer millions every year — and they quite often get a guaranteed, above-market rate return on all the dollars they stuff in these no-limit stashes. Last January, Target CEO Robert Ulrich retired with over $140 million in his deferred pay account.

America’s highest-paid power suits — the managers of hedge and private equity fund partnerships — have even a sweeter tax code loophole. The top 50 of these fund managers last year averaged $588 million each in earnings. These incomes don’t up show in the annual CEO pay rankings because fund managers aren’t technically CEOs. They don’t get paid like CEOs either.

Fund managers take their compensation in the form of fees they assess on the investments they manage. They typically cream off, as a “carried interest” fee, 20 percent of the profits they make buying and selling companies and other assets. On these windfalls, fund managers pay taxes at just a 15 percent rate — not the 35 percent top rate on ordinary income — because the tax code lets them claim their “carried interest” as a capital gain.

On every $1 million pocketed in carried interest, in other words, an investment fund manager saves about $200,000 in taxes. This subsidy costs taxpayers $2.6 billion a year.

Corporations save twice that much every year from an even more outrageous loophole, what Executive Excess 2008 dubs the “unlimited tax deductibility of executive pay.” Top companies can essentially deduct whatever they pay their executives off their corporate income taxes, so long as they define that pay as a performance-based incentive.

The more corporations pay their top execs, in effect, the less they pay in taxes.

Direct subsidies for America’s most powerful, Executive Excess 2008 estimates, add up to $20 billion a year. To place this $20 billion in context, the report also notes what the federal government is currently spending to educate America’s most vulnerable, children with disabilities and other special needs: only $10.8 billion a year.

Billions more in CEO pay subsidies, Executive Excess adds, flow indirectly, through government bailouts and procurement. Federal officials regularly let out contracts to corporations that pay their executives hundreds of times more than their workers.

One example: Lockheed Martin is currently getting about 80 percent of its revenue from the federal contracts. Lockheed Martin CEO Robert Stevens made $24 million last year, 787 times the pay of a typical U.S. worker.

Legislation that would end this indirect subsidy for lush CEO compensation, Executive Excess 2008 makes clear, is already before Congress. The pending Patriot Corporations Act would give a preference in federal contract bidding to companies that pay their executives no more than 100 times the pay of their lowest-paid employee.

Bills that would end all the subsidies that encourage lavish CEO pay, Executive Excess 2008 takes pains to emphasize, are already pending before Congress. But this legislation is going nowhere, and neither Senators Obama or McCain have yet staked out a position of most of these needed legislative fixes.

Still, the tide may be shifting.

“Historically, troubled economic times in the United States have helped generate long overdue public policy reforms,” sums up the new Executive Excess. “We have now entered troubled economic times, likely our worst since executive pay started ballooning in the 1980s. Ballooning executive pay has helped create our current economic woes. Deflating that excess can help end them.”

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies.

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