Become a digitalPLUS subscriber. 99¢ for 4 weeks.
NewsOpinionOp-Eds

Americans need to stop subsidizing CEO pay

CEO PayEarningsStock MarketCorporate OfficersBill Clinton

Almost everyone knows CEO pay is out of control. It surged 16 percent at big companies last year, according to the New York Times, and the typical CEO raked in $15.1 million.

Meanwhile, the median wage continued to drop, adjusted for inflation.

What's less well-known is that you and I and other taxpayers are subsidizing this sky-high executive compensation. That's because corporations deduct it from their income taxes, causing the rest of us to pay more in taxes to make up the difference.

This tax subsidy to corporate executives from the rest of us ought to be one of the first tax expenditures to go, when and if Congress turns to reforming the tax code.

We almost got there 20 years ago. When he was campaigning for the presidency, Bill Clinton promised that if elected he'd end the deductibility of executive pay in excess of $1 million.

Once in office, though, his economic advisers urged him to modify his pledge to allow corporations to deduct executive pay in excess of $1 million if the pay was linked to corporate performance — that is, to the value of the company's shares.

(I hate to sound like a told-you-so, but I was the one adviser who wanted the new president to stick to his campaign promise without creating the pay-for-performance loophole.)

President Clinton agreed with the majority of his advisers, and a new provision was added to the Internal Revenue Code, Section 162(m), allowing corporations to deduct from their tax bills executive compensation in excess of $1 million — but only if the compensation is tied to company performance.

How has it worked out? Even Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, agrees it's been a sham: "162(m) is broken. ... It was well-intentioned. But it really hasn't worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule."

One such game has been to hand out performance awards on the basis of nothing more than an upward drift in the value of the stock market as a whole, over which the executives played no role other than watch as their company's stock price rose along with that of almost every other company.

There's no reason top executives should get a tax subsidy from the rest of us simply because the entire stock market has done well. Logically, a company's share price — and any executive performance tied to it — should be measured only relative to a broad index of the market as a whole.

Another game has been to back-date executive stock options to match past dips in the companies' share price, thereby exaggerating the subsequent upswing and creating fatter "performance" bonuses.

Officially, companies are required to report all options issuances within two days of the date of issue. Unofficially, companies — and their executives — still have huge discretion over when they issue options, aided by a small industry of compensation experts and accountants.

A third game has been to lowball the earnings estimates that set the initial thresholds for performance pay. Then, when the real earnings come in over those estimates (as they almost always do), companies give out fat "performance" awards.

Shareholders get taken to the cleaners by all these maneuvers. Executive pay is skyrocketing even at companies whose share prices have dropped.

But it's not only shareholders who lose. You and I and other taxpayers are also being ripped off, because this so-called "performance" pay is deducted from corporations' taxable earnings.

The Economic Policy Institute estimates that from 2007 to 2010, a total of $121.5 billion in executive compensation was deducted from corporate earnings, and roughly 55 percent of this total was for performance-based compensation. Given all the games, it's likely much of this "performance" was baloney.

So what's the answer? As I argued 20 years ago, keep the pay cap at $1 million and get rid of the performance-pay loophole. Corporations shouldn't be able to deduct executive pay in excess of $1 million, period.

Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of "Beyond Outrage," now available in paperback. He blogs at http://www.robertreich.org.

Copyright © 2014, The Baltimore Sun
Related Content
CEO PayEarningsStock MarketCorporate OfficersBill Clinton
  • Obamacare is a 'varsity stinker'
    Obamacare is a 'varsity stinker'

    OK, I can't help myself. Over the past three years, I have written at least a dozen columns critical of Obamacare (a.k.a. The "Affordable Care Act") in this space and devoted an entire chapter to the topic in my book "America: Hope for Change."

  • Maryland delegation should petition for release of Cuban Five
    Maryland delegation should petition for release of Cuban Five

    In 1999, I accompanied the Baltimore Orioles on their historic trip to Havana, Cuba. This marked the first time since 1959 that a Major League Baseball team played in Cuba. Many of us hoped that a baseball game involving teams from the United States and Cuba might be a precursor to normalized...

  • Kids ID cards cross a line
    Kids ID cards cross a line

    "The Hunger Games." "The Giver." "Divergent."

  • Calling women to action for a stronger democracy
    Calling women to action for a stronger democracy

    There was a time that Maryland's congressional delegation included as many women as men. Remarkably, in 1984, Maryland voters elected women to half of the state's seats in Congress: Reps. Helen Bentley, Beverly Byron, Marjorie Holt and Barbara Mikulski. In the election of 2014, exactly 30 years...

  • Media message unfair to missing child
    Media message unfair to missing child

    I was relieved to hear that the missing 12-year-old Baltimore County girl was found and returned to her worried parents. Yet I still remain perplexed at the way her disappearance was reported. Seemingly in the same breath that news outlets reported that the child was missing, they also reported...

  • NSA scandals caused rift with U.S. allies
    NSA scandals caused rift with U.S. allies

    No single issue has caused greater damage to the trust between the United States and its allies than the sweeping revelations of the National Security Agency's global surveillance programs. This story continues to fuel the perception that we no longer care to uphold our values at home or...

Comments
Loading