How Corporate America is Spending Its Tax Savings

With Corporate America finally getting their wish for a lower headline corporate tax rate fulfilled, a recent poll by Willis Towers Watson shows how the decision makers plan to spend their new windfall from the Tax Cuts and Jobs Act.

The survey of 333 large and midsize employers reveals the following plans by category:

Employee Benefits:

1.) 66 percent are planning, considering or have already taken action on making changes to their benefits programs.

2.) 34 percent are planning or considering expanding personal financial planning.

3.) 26 percent are planning or considering increasing 401(k) contributions.

4.) 19 percent are planning or considering increasing or accelerating pension plan contributions.

Employee Compensation:

5.) 64 percent are planning, considering or have already taken action on their broad-based employee compensation programs.

6.) 43 percent are planning or considering conducting a review of their compensation philosophy.

7.) 36 percent are planning or considering addressing pay-gap issues.

8.) 21 percent are planning or considering introducing a profit-sharing or one-time bonus payout to all employees.

Executive Compensation:

9.) 41 percent are planning, considering or have already taken action to change their executive pay programs.

10.) 33 percent are planning or considering spending more time and analysis on this year's incentive targets.

11.) 19 percent are planning or considering increasing the use of discretion in 2018 executive compensation plans.

According to Bloomberg, only 4 percent of companies stated that, in light of the Tax Cuts and Jobs Act, they had raised wages for all employees and an additional 3 percent stated that they planned to do so in the next year.  In contrast, 80 percent of companies stated that they aren't giving any raises whatsoever.  

Now, let's look at another poll by Willis Towers Watson which shows us where Corporate America could be (and should be) spending at least some of their new tax lottery winnings.  According to a 2017 year end poll of 389 Fortune 1000 companies that sponsor defined benefit pension plans with a year end of December, the funding levels of private defined benefit pension plans has not improved significantly since the depths of the Great Recession as shown here:

It is interesting to see that, despite the robust stock and bond markets since 2014, the aggregate funding level of America's largest private sector defined benefit pension plans has shown negligible improvement.  In fact, the pension deficit at the end of 2017 is projected to be $292 billion compared to assets of $1.43 trillion.  Companies did contribute $51 billion to their pension plans in 2017, double the amount needed to cover benefits accruing during the year, however, plans are still significantly underfunded with total pension plan obligations rising to $1.72 trillion in 2017 from $1.65 trillion in 2016 as baby boomers start leaving the workforce.

While Corporate America is delighted with the prospect of lower taxes, unless executives start taking significant measures to roll back their defined benefit pension plan deficits, Main Street America will find that the "shiny, one time baubles" that are offered by a relatively small fraction of American corporations thanks to the Tax Cuts and Jobs Act will pale into insignificance when it comes to retirement time.  With only 19 percent planning or considering increasing pension plan contributions as a result of the new lower corporate tax regime, it looks like it's going to be a cat food future for millions of American workers.

Comparing Federal Government and Private Sector Employment

With the Federal government in shutdown mode and hundreds of thousands of federal government workers on temporary furlough, I thought that it would be an interesting exercise to look at the number of Federal government employees and how the level has changed over the past decade.  Here is a graph from FRED showing just that:

Ten years ago, there were 2.742 million federal government employees, excluding uniformed members of the military.  At the beginning of the latest recession in December 2007, there were 2.756 million federal employees, the level being basically unchanged over the four years leading up to the Great Recession.  By the end of the recession in June 2009, federal government employment had risen to 2.815 million and hit a peak of 3.415 million for a single month in May 2010.  Between September 2010 and October 2012, the number of federal employees remained in a range of between 2.8 and 2.9 million then began its gradual drop to its current level of 2.739 million.  At its current level, federal government jobs comprise about 2.4 percent of the total workforce, down very slightly from 2.5 percent a decade ago.   It is interesting to see that while the rest of the economy saw a significant retrenchment in total private non-farm employment during the Great Recession as shown here:

The number of total non-farm, private sector employees is still 1.68 million or 1.45 percent below its pre-Great Recession peak, having dropped from a peak of 115.66 million in December 2007 to its nadir of 106.9 million in January 2010, a fall of 7.6 percent.  In contrast, over the same time frame, the number of federal government workers was at a level that was higher than its pre-recession level for the entire five year period from the beginning of 2008 to the end of 2012.

Here's a graphic showing how federal government employees were divided by government branch and department in 2010, including part-time and part-year workers:

Here is a chart comparing education levels for the federal government employees and private sector employees:

A hefty portion of private sector workers (41 percent) have high school or equivalent education compared to only 20 percent of workers in the federal government.

  

How does wage compensation level for an average full-time, private sector worker compare to an average full-time federal government employee?  Here's the answer in 2010 dollars from a January 2012 study released by the Congressional Budget Office:

Private sector workers with a high school diploma or less are earning 21 percent less than equivalent workers in the federal government.  Even private sector workers with a Bachelor's Degree are seeing a 2 percent penalty compared to their federal counterparts.  The biggest gains in the private sector over the federal government are not seen until one has a Professional Degree or PhD; for these individuals who are working in the private sector, there is a 23 percent wage premium over their federal government counterparts.

I found this part particularly interesting.  Here is a comparison of private and federal government benefits by level of educational attainment:

On average, over all educational levels, the benefits paid to federal employees are 48 percent higher than those found in the private sector.  For those private sector workers with some college or a high school diploma, there is a 71 and 72 percent negative difference in the value of their benefits compared to their federal government counterparts.  It is largely the value of federal pension and health care benefits that attracts workers who plan to stay with the federal government for most of their working career, unlike the private sector where both benefits have historically been optional.

Now, let's total the wage and benefit compensation for both sectors and divide it into groups based on educational attainment:

As expected, the private sector loses out again, particularly if a worker has achieved an educational level of some college or less.  In those two cases, there is a 32 and 36 percent negative difference in the total value of their compensation.

In graphical form, here's what total average compensation for both private and federal government workers looks like:

In fiscal 2011, the government spent approximately $200 billion to compensate federal employees; a total of about $80 billion to compensate civilian personnel working for the Department of Defense and about $120 billion for non-defense personnel working in all other departments.

It is interesting to put the amount spent on federal employee compensation into context in the grand scheme of federal spending and then compare average compensation levels in the federal government to those found in the private sector.  It will be fascinating to see how long it takes before someone proposes either a significant cut in staffing levels or a realignment in compensation to bring it more in line with the private sector, particularly if the Senate and Congress are looking to reduce spending (if indeed that EVER happens).

 As an aside, today when I tried to get data on United States federal government payroll, I got this:

...and this:

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