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 huge 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.
Fix the Debt is a corporate-backed lobby group committed to slashing Social Security and other earned benefits and social 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 options and other so-called “performance-based” pay. These CEOs are raking in huge taxpayer-funded bonuses at the same exact time they’re insisting on deep cuts in the government programs that benefit ordinary Americans.
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 average 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.
[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.