Heard off the street: Congress is to thank for executive pay
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Those whose blood pressure is elevated by the sums that the captains of American industry are paid, have two new reasons to ask the doctor to up their meds.
The Institute for Policy Studies reported last week that 26 of the largest U.S. public companies paid their CEOs more than the company paid in U.S. taxes last year -- despite the fact that the companies had average U.S. pre-tax income of more than $1 billion.
Moreover, four tax code provisions that apply to executive pay generated $14.4 billion in tax savings for the companies last year. The liberal Washington think tank also estimated that 57 CEOs saved more than $1 million on their 2011 federal taxes, thanks to tax cuts enacted when George W. Bush was in the White House.
A different study by the Economic Policy Institute estimated that tax code provisions relating to executive pay enabled about 8,000 U.S. public companies to lower their corporate tax bill by $30.4 billion between 2007 and 2010.
No doubt, the findings will incite renewed outrage over CEO pay, a sentiment Institute for Policy Studies officials were not shy about expressing.
"At a time of austerity, it's beyond absurd that billions of our tax dollars are pouring into executive pockets," said Sarah Anderson, co-author of the institute's study. "Every CEO should be sending a thank-you card to the IRS."
Ms. Anderson's last comment is off target; the IRS gets its marching orders from the repository of public trust known as Congress.
Elected officials frequently succumb to temptation, using the tax code as a blunt weapon to advantage or disadvantage some group based on prevailing political winds. Oftentimes their tinkering generates unintended consequences.
Take two-decade-old restrictions that Congress imposed on how much executive pay public companies can deduct for tax purposes.
When implemented in 1993, public companies could only deduct the first $1 million they paid to their CEO and the next four highest-paid executives. The provision was subsequently changed to apply only to the CEO and the three-highest paid executives, said Steven Balsam, the Temple University accounting professor who authored the Economic Policy Institute report.
The limit applies only to pay that is not based on performance: salaries, bonuses, perquisites and some other items.
Public companies also can deduct compensation the executives get for achieving performance goals. The incentive plan must be disclosed to shareholders and approved by them. Shareholders vote down less than 1 percent of the incentive plans they are asked to approve, according to Todd Sirras of Semler Brossy, a Los Angeles pay consultant.
Performance-based pay accounted for 55 percent of the $121.5 billion in tax deductions booked from 2007 to 2010 by the companies Mr. Balsam examined.
Alas, Congress' plan to rein in CEO pay has come to naught.
Not only has it swelled since 1993, the limit on deducting certain types of pay has not restrained corporate generosity. Mr. Balsam said 4,729 executives received more than $1 million in nonperformance-based pay in 2010 versus just 3,379 in 2007.
That indicates tax considerations do not drive all the decisions tax-sophisticated companies make. Sometimes, "When push comes to shove, the executives are going to put their interests over the shareholders," Mr. Balsam said.
Another example of unintended consequences of tax code tinkering are golden parachute payments given to executives who lose their jobs in a takeover. If the lovely parting gifts exceed three times the executive's average pay over the last five years, the company cannot deduct the payment for corporate tax purposes and the executive pays a 20 percent excise tax on the amount over the limit.
What did companies do when confronted by a Congress hellbent on curbing their pay? Those without golden parachutes adopted them and companies began making additional payments to the departed to cover taxes they owed on their golden parachutes, Mr. Balsam said.
As outrageous as all of this sounds, context is necessary.
Mr. Balsam said the $1 million deductibility cap applies only to four executives at publicly traded companies.
Additionally, the $7 billion or so in annual tax savings the companies he examined amount to less than 1 percent of the federal budget deficit.
"That's an indication you're not going to balance the budget on the backs of the top 1 percent," Mr. Balsam said.
Congress has rarely made a serious, disciplined -- much less, thoughtful -- attempt to modify the tax code, which Mr. Balsam called "a monstrosity."
Given their considerable wealth -- nearly half of the members of Congress are millionaires, according to the Center for Responsive Politics -- and the wealth of the donors who finance their campaigns, Congress should prove as adept at fashioning a rational tax code as it has been at curbing executive pay.
First Published August 19, 2012 12:00 am