"Fix the Debt" CEOs Enjoy Taxpayer-Subsidized Pay
By
Sarah Anderson, Scott Klinger and Javier Rojo, Institute for Policy
Studies
REPORT
KEY FINDINGS
Thanks to a "performance
pay" tax loophole, large corporations in the United States today
are routinely deducting enormous executive payouts from their income
taxes. In effect, these companies are exploiting the U.S. tax code to
send taxpayers the bill for the hue rewards they're doling out to
their top executives.
- During the three-year period 2009-2011, the 90 publicly held corporate members of the austerity-focused "Fix the Debt" lobby group shoveled out $6.3 billion in pay to their CEOs and next three highest-paid executives.[i]
- These 90 Fix the Debt member firms raked in at least $953 million - and as much as $1.6 billion - from the "performance pay" loophole between 2009-2011. The exact full value of corporate windfalls from this loophole will remain impossible to compute until we have more complete mandated disclosure for executive compensation.
- Top executives at these same Fix the Debt companies are aggressively advocating cuts to government programs that benefit the ordinary American taxpayers subsidizing their compensation. Many of these executives have also added to America's debt and deficit by using tax havens and other accounting tricks to have their corporations avoid paying their fair tax share.[ii]
- Health insurance giant UnitedHealth Group enjoyed the biggest taxpayer subsidy for its CEO pay largesse. The nation's largest HMO paid CEO Stephen Hemsley $199 million in total compensation between 2009 and 2011. Of this, at least $194 million went for fully deductible "performance pay."[iii] That works out to a $68 million taxpayer subsidy to UnitedHealth Group - just for one individual CEO's pay. A just-released proxy reveals that Hemsley pocketed another $28 million in "performance pay" in 2012, which computes into a tax break for UnitedHealth of nearly $10 million.
- Discovery Communications stood next in line for a government handout. Between 2009 and 2011, CEO David Zaslav pocketed $114 million, $105 million of this in exercised stock options and other fully deductible "performance pay." That translates into a $37 million taxpayer subsidy for Discovery and its lavish executive pay policies. In 2012, Zaslav hauled in enough additional "performance pay" to generate a tax break worth $9 million.
Even big losers win with the
"performance pay" loophole. Gambling titan Caesars
Entertainment has hemorrhaged money in recent years, driving CEO Gary
Loveman's stock options underwater. Loveman managed, even so, to take
home $9.6 million in cash bonuses between 2009-2011, a windfall
that's generating taxpayer subsidies the firm can cash in to lower
its taxes over years to come.
INTRODUCTION
Fix the Debt is a
corporate-backed lobby group committed to slashing Social Security
and other earned benefits and social
The
insurance programs - all under the veil of "deficit reduction."
But, as this report documents, the very taxpayers who pay into and
depend on these programs and benefits are subsidizing excessive
compensation for the top executives of Fix the Debt member
corporations and other large firms.
These
pages calculate how much the corporations Fix the Debt CEOs manage
have benefited from a federal tax code loophole that lets major firms
deduct unlimited amounts off their income taxes for the expense of
executive stock
A
loophole history
In
1993, amid widespread public revulsion at executive pay excess,
Congress passed legislation that capped the tax deductibility of
executive pay at $1 million. The ostensible message this legislation
sent: No rational society can view annual executive compensation over
$1 million as a reasonable business expense worthy of a tax
deduction. Without putting a ceiling on executive pay, this reform
aimed to prevent taxpayers from subsidizing amounts over $1 million
per executive. But the law left a huge loophole. Corporations could
exempt "performance-based" pay from the $1 million limit.
This loophole quickly led to an explosion of "performance-based"
compensation, particularly in the form of stock options.
Corporate
boards of directors touted this new surge in stock options as a means
to align the interests of executives and shareholders. In practice,
options align only greed and the tax code. If a firm's shares decline
in value over time, shareholders lose wealth. But executives with
stock options lose nothing. In fact, during stock slumps, executives
often receive boatloads of new options with lower exercise prices. In
2007, for instance, Goldman Sachs gave executives options to purchase
3.5 million shares. In December 2008, after the crash had driven
Goldman shares to record lows, the bank's top executives received
nearly 36
million stock options, ten times the previous year's total. This
new grant positioned Goldman executives for massive new windfalls
even if the bank's shares never regained their 2007 price level.
On
the upside, stock options gains have no limit, a reality that
encourages reckless, short-sighted executive behaviors designed to
jack up share prices by whatever means necessary. What sort of
reckless behaviors? Over the past two decades, the Institute
for Policy Studies has documented the connections between
massive CEO options payouts and corporate tax-dodging, excessively
risky financial gambles, and accounting fraud.
Stock
options also provide huge personal
tax advantages for executives. If executives hold onto their
shares for more than two years after the grant date and more than a
year after the exercise date - the point at which the stock is
transferred to the executive - they pay only the long-term capital
gains tax rate on this income. This rate will rise from 15 to 20
percent as a result of the "fiscal cliff" deal, a rate
still far lower than the new 2013 top marginal rate of 39.6 percent
on ordinary income.
The
performance pay loophole, in short, serves as a critical subsidy for
excessive compensation. The larger the executive payout, the less the
corporation pays in taxes. And Taxpayers wind up footing the bill.
For
data on individual CEOs and corporations, tables, charts,
methodology, and appendices, please see the full
report.
[i]To
analyze the tax implications of compensation, we included forms of
pay that were taxable in the year received: salary, bonus, non-equity
incentives, perks, and the value of options realized and vested
stock. (Stock options are taxed in the year they are exercised and
stock awards in the year they vest).The executives in the sample are
those covered by Section 162(m) of the tax code: the CEO and next
three highest-paid executives, excluding the CFO. For banks in the
Troubled Asset Relief Program (TARP), 162(m) also applied to CFOs,
and we added the CFO data for these banks during the years they
participated in TARP. See annex for more detail.
[ii] See: http://www.alternet.org/economy/10-filthy-rich-tax-dodging-hypocrites-pushing-disastrous-austerity-america.
[iii]Hemsley
received the bulk of his compensation in the form of exercised stock
options, a pay category considered “performance-based.” He
received much smaller amounts in the form of vested stock awards. For
2011, the company identified what portion of the value of this stock
qualified “performance-based.” For the other two years, it did
not.
