How To Pay Uncle Sam Less

The Institute for Policy Studies (IPS) recently released their 19th Annual Executive Pay Survey entitled "The CEO Hands in Uncle Sam's Pocket", a look at how American taxpayers are subsidizing executive pay. Here are a few of the highlights.

1.) Of last year's 100 highest paid American corporate CEOs, 26 took home more pay than their companies paid in federal income taxes, up from 25 the previous year, receiving an average of $20.4 million in total compensation.  This was up 23 percent over the previous year.  

2.) On average, these 26 corporations were very profitable, earning more than $1 billion in average pre-tax income.  On those hefty profits, the corporations received average net tax benefits from the Federal government of $163 million.  

3.) These tax benefits were largely received because each of the 26 corporations has an average of just under 21 tax-haven based subsidiaries.

The Bush-era tax breaks have greatly benefitted America's corner office dwellers.  On top of what  should be considered an ample base salary, most of these gentlemen receive compensation boosts through the issuance of stock options, performance shares and other very creative stock-based pay that is preferentially taxed compared to "ordinary" income.  This could well be termed "executive privilege" since most of us who sweat while we work do not receive the vast majority of our compensation in company stock.

Here is the entire list of companies that paid their CEOs more than they remitted to Washington:

Notice that two of the corporations have more than 100 tax haven subsidiaries.  In total, the 26 CEOs made $531,594,681 in compensation while their federal corporate tax remittances totalled negative $4.25 billion on profits of $99.631 billion.  Must be nice if you can get it.

Let's take a detailed look at two CEO's who received compensation that is in excess of what their firms remitted in federal income taxes last year.

1.) Citigroup -  refunded $144 million in taxes in 2011

CEO Vikram Pandit - received $14.9 million in compensation for 2011 

Citigroup exists only because of the largesse of American taxpayers and TARP; estimates show that Citi gleaned nearly half a trillion dollars in total assistance, the most of all American banks.  Mr. Pandit received $38.2 million in compensation in 2008 and agreed to take only $1 in salary until Citi became profitable.  Citi offered Mr. Pandit $14.9 million in 2011 which was voted down by just over half of all shareholders; unfortunately, as of July, Citi's board had not revealed whether or not they would be bound by the non-binding vote.

2.) American International Group (AIG) - refunded $208 million in taxes in 2011

CEO - Robert Benmosche - received $13.9 million in compensation for 2011

AIG was the insurer behind the near implosion of the world's economy back in 2008; that's why American taxpayers still own 60 percent of the company.  At that time, the company received a bailout of $182 billion and a decision from the U.S. Treasury that allowed it to retain losses to offset against future profits.  This has allowed AIG to report more than $19 billion in tax-free profits in 2011.  CEO Benmosche has seen his compensation rise like a phoenix from the ashes; from  $2.7 million in 2009 to $13.9 million in 2011, a rise of 415 percent.

As I wrote earlier, stock options (aka performance-based pay) are largely responsible for overly inflated executive compensation (although, I'd like an opportunity to try living on their base salaries of a million dollars plus per year for a few years!).  A loophole in stock option accounting allows corporations to reduce their tax bills; IPS has estimated that the annual cost of this loophole is $2.5 billion in lost federal tax revenue with the biggest beneficiary in 2010 being our old friends at Apple who, in 2010, deducted $743 million and received a $260 million tax subsidy thanks to Main Street taxpayers.  Incidentally, new CEO Timothy Cook set a new pay record of $374 million in 2011.  Here are some of the other big beneficiaries of this particular loophole:

While it's all wonderful that the Presidential candidates are talking about fiscal responsibility and debt and deficit reduction, it is more than a bit off-putting when one sees that it is quite obvious where tax reform needs to take place.  Unfortunately, those that we elect seem myopic when it comes to tax reform that may impact their donors  and/or future/past employers.

CEO Compensation - How the Other Half Lives

The Wall Street Journal and Hay Group released its annual study of Chief Executive Officer compensation in early May.  The Hay Group is a "global management consulting firm", headquartered in Philadelphia, with 85 offices in 49 countries developing managers and executives.

In their 2010 CEO Compensation Study, the Hay Group examined the various elements that comprise the compensation packages of CEOs working for the 350 largest United States corporations.  The data used in the study is sourced from the proxy statements filed with American securities regulatory bodies between May 1, 2010 and April 30, 2011.

American corporations are now facing the impact of "say on pay", the rule adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  "Say on Pay" allows shareholders to vote on executive compensation packages for all public companies.  This is a step in the right direction as the original laws meant that "say on pay" was either non-binding or for companies that received funding from the Troubled Assets Relief Program.  Apparently, a very small percentage of shareholders are appear to be concerned about CEO compensation, especially in years where stock prices are in positive territory.  While that may be true among institutional shareholders that generally hold the lion's share of any publicly traded company, my suspicion is that the same cannot be said for many of the smaller volume "mom and pop" shareholders who hold a few hundred shares out of hundreds of millions floating out there in the ether.  Their voices against excessive CEO compensation are simply not heard and appear as a minor statistical blip on the proxy voting radar screens.

Despite statistics that show that the massive increases in CEO compensation is wearing thin amongst shareholders, boards of directors still approved pay levels that were substantially higher in 2010 - 2011 than they were in 2009 - 2010.  This could be due, at least in part, to improving profitability among the 350 companies in the study; on average, corporate net income was up 17 percent on a year-over-year basis and shareholder return averaged 18 percent.  Hey, it's a lot easier for shareholders to digest a big pay raise for a CEO when the stock value is climbing than when it's falling!  The major change in compensation was in the emphasis on performance related long-term incentives rather than just stock options.  As well, a smattering of companies eliminated some of the perquisites that seem to accompany compensation for those who dwell at the top of the ivory tower.  After all, without the "toys", how are we going to attract the "boys"?

Here is a summary of what 2010 looked like on average for the "big guys" living in the plush corner offices:

Average Base Salaries: $1.1 million

Average Annual Incentive Payments: $2.2 million (up 19.7 percent)

Average Long Term Incentives: $6.2 million (up 7.3 percent)

The biggest gains were found in the Basic Materials sector which saw a pay increase of 27.7 percent with Health Care bringing up the rear (sad pun) with a tiny pay increase of only 0.2 percent.  By the way, if you take the measly $1.1 million that an average CEO is receiving as their base pay and divide that into a 40 hour work week, it works out to only $528.85 per hour.

A further breakdown of the compensation package shows that 41 percent of the long term incentive value was comprised of performance awards.  Stock options declined from 39 percent in 2009 to 34 percent in 2010.  Many corporations are now using a number of financial vehicles when assessing long term incentives.  Rather than strictly using stock options, many are now using long-term performance plans and time-vested restricted stock.  Restricted stock has its advantages; once the stock is vested, it belongs to the CEO and is worth something whether or not the price has fallen.  On the downside, restricted stock is taxed in the year that the stock is vested and tax is paid as income rather than capital gains.  Ah, the poor CEO.  They just cannot win.

Let me rephrase that last sentence.  Sometimes they just cannot win...but that excludes last year.  With the rising stock market, many CEOs have seen the value of their long term incentive awards climb rapidly; in combination with the equity granted as part of their compensation during the market lows in 2009, most CEOs are sitting on a very tidy sum of "in the money" stock.

Lastly, let's take a quick look at CEO perquisites.  Of the 350 companies in the study, a whole 55 disclosed that they had eliminated at least one of their perks.  Tax gross-ups on perquisites were eliminated by 28 companies followed by 10 companies that eliminated country club memberships.  On the upside, if you happen to be a CEO in the study group, there are still 219 of your pals out there who are still using the corporate aircraft for personal use.  Hey, why fly in cattle class when you can take the company bus!  I just love this quote from the press release for the study:

"By the end of the year, many companies decided that these items weren‟t worth the attention they were getting, forcing executives to bite the bullet and pay their own way on many of these items."

Poor, poor babies.  Apparently even a whiff of the lifestyle of the sweaty masses is distasteful to their sensibilities.

In closing, I'd like to make one brief comment on CEO compensation in comparison to the wages earned by those who sweat for a living (and by that, I don't mean sweating on the country club tennis courts).  Back in September 2011, the Institute for Policy Studies released their "Executive Excess 2010: CEO Pay and the Great Recession" study.  In that study, they show that in 2009, the average American CEO made 263 times the compensation received by their workers.  This is up from less than 30 times in the 1970s.  In 2009, the compensation for an average CEO was $8.5 million, up from $1.8 million in the years from 1980 to 1989 (adjusted to 2000 dollars).  In February 2011, the Congressional Budget Office released their report entitled "Changes in the Distribution of Worker's Hourly Wages between 1979 and 2009".  Between the years 1979 and 2009, the median wage for men rose a massive 8 percent after inflation to $18.50 per hour.

I wonder if personal use of the corporate jet is included?

CEOs - The More You Cut, The More You Get Paid

Yesterday, the Institute for Policy Studies (IPS), a Washington-based think-tank with a liberal leaning released their report entitled "Executive Excess 2010: CEO Pay and the Great Recession". In case you weren't aware of IPS, here's how they describe their organization:

"IPS is a community of public scholars and organizers linking peace, justice, and the environment in the U.S. and globally. We work with social movements to promote true democracy and challenge concentrated wealth, corporate influence, and military power."

On to the report.

IPS notes that America's CEOs had a pretty rough year in 2009. Over the past year, we have been reminded that CEOs have been suffering along with the proles; their compensation packages have suffered exactly the same as the rest of us during the Great Recession of 2009. In contrast, here's the first paragraph of the survey:

"Two years into the worst economic crisis since the Great Depression, executive pay — after adjusting for inflation — is still running at double the 1990s CEO pay average, quadruple the 1980s average, and eight times the average executive pay in the mid-20th century."

From a chart in the report, we can see that the median annual CEO pay (adjusted to 2000 dollars) for the top 50 largest United States firms rose from $1.8 million in the years from 1980 to 1989, to $4.1 million in the years from 1990 to 1999, to $9.2 million in the years from 2000 to 2005 and dropped (oh the carnage!) to $8.5 million in 2009. By comparison, the wages of the sweaty masses have dropped and people are taking home less now than they did in the 1970s in inflation-adjusted dollars. To put the whole picture into context, in the 1970s, very few CEOs made over 30 times the salary of their average worker. In 2009, the CEOs of the top 50 U.S. companies had compensation packages that averaged 263 times the compensation received by their workers. Think about it. When you compare the purchasing power of your compensation, has it kept pace with your cost of living and, more importantly, how do your historical compensation package increases compare to those at the top of the pile where you work? At the same time, you could ask yourself how many CEOs do you see suffering with their 40 foot yachts and 8000 square foot mansions with 5 bathrooms?

What is even more annoying about this whole scenario is that, in 2009, IPS reports that the CEOs who slashed the number of their employees by the greatest number, took home 42 percent more compensation that the year's average chief executive pay for S&P 500 companies. To use the numbers from the report, the slasher CEOs average compensation totalled $11,977,128 compared to $8,419,411 for the average S&P 500 CEO. That's a $3,557,717 reward to the CEOs who helped some of their employees pack their boxes and take an extended unpaid vacation without benefits.

Let's look at who the report names, the companies they work for, their compensation and how many people these fine gentlemen tossed to the cold, hard streets of America. The layoff time period falls between November 2008 and April 2010. As in the report, these CEOs are named in order of compensation.

The Top of the Heap Award goes to Fred Hassan of Schering-Plough. His compensation, including a $33 million golden parachute after his company merged with Merck, totalled $49,653,063. Oh yes, and Schering-Plough/Merck turfed 16,000 employees. As an aside, the merged firm had profits of $12.9 billion in 2009, up 33 percent over 2008.

The First Runner Up Award goes to William Weldon at Johnson & Johnson. His compensation package totalled $25,569,844 up from $23 million in 2008 despite the fact that his company was faced with the recall of many of its products. During the time frame noted above, the company laid off 8,900 of its hard-working, but apparently surplus, employees.

The Second Runner Up Award goes to Mark Hurd at Hewlett-Packard. His compensation package for 2009 totalled $24,201,448 - perhaps he came in third because he only sent 6,400 employees packing during the time frame of the study. I guess the HP Board must have forgotten about the 24,600 job cuts announced in September 2008. According to some employees at HP, there have been far more layoffs than reported in the IPS study. In this particular case, as your mother always told you "what goes 'round comes 'round"; Mr. Hurd got turfed on August 6th, 2010 for misconduct. Unlike the rest of us who sweat when we work, Mr. Hurd's severance consists of $12.2 million in cash and $16 million in stock. I don't know about you, but I think I could live on that for a couple of years...well, maybe a year!

The Mr. Congeniality Award goes to Robert Iger, CEO of the apparently not-so-family-friendly Walt Disney Company. His compensation package totalled $21,578,471 and he sent 3,400 members of the Disney family on an extended (and permanent) vacation to the Magic Kingdom found on the streets of a city near you.

I don't want to bore you with any more names and numbers, but the next 6 companies on the list are IBM, AT&T, Wal-Mart, Ford, United Technologies and Verizon.

One section of the report that should not be missed is the chart showing the highest-paid executives at bailed-out companies like Citigroup, Bank of America, JP Morgan etcetera. It's more than a bit nauseating when one sees that John Havens, CEO of the Clients Group (basically the head of Investment Banking) at Citigroup had a 2009 compensation package totalling $12,126,261 after Citigroup got $50 billion in bail-out funny money. That's $958,310 in bail-out money for each of the 52,175 Citigroup employees that were laid off during the time frame of the study.

What can we, the powerless proles, do about this situation? Here are three ideas:

1.) If you don't like what a company who falls into this category is doing to its employees or how they're rewarding their CEOs, simply do your business elsewhere. There's nothing like dropping sales and the resulting drop in profits to shake up an executive team.

2.) If you live in the United States, contact your government representatives at federal and state level and demand that no additional bail-out funds go to firms that lay-off staff at the same time as they continue to reward senior executives with obscene bonuses and stock options. If, in fact, the economy does descend into Part 2 of the Great Recession, the same corporations that came to the government with hats-in-hand looking for spare change will not think twice about coming back again. This is the time to ensure that Part 2 of the Great American Corporate Bail-out does not happen.

3.) If you hold stock in any company or companies, ensure that you read through their annual disclosure documents to educate yourself on their executive compensation practices. If enough shareholders forward resolutions regarding pay reforms ("say on pay") at annual meetings, eventually corporate leaders will get the message (hopefully). Make certain that you vote your proxies in favour of any shareholder-led resolutions that seek to limit executive compensation. If you chose not to vote or to vote with management, the system will never change.

I hope that you will take the time to read the entire IPS Executive Compensation Survey. While you may find your blood pressure rising as you read, at the very least, you will be a better educated investor and consumer.

References:

Executive Excess 2010: CEO Pay and the Great Recession