In the two years since Congress passed the Republican tax law, the richest 1 percent have been the big winners.
Taxpayers, once again this year, are subsidizing over-the-top CEO pay by the billions. But now on the table: a promising new proposal that encourages corporations to share that excess — or else.
The chief executives of America’s top 500 companies, Forbes reported last week, saw their pay rise an average 12 percent in 2010.
The week before last, the New York Times looked at 200 top companies and computed the median CEO pay hike for those 200 at 12 percent as well. The week before that, USA Today surveyed 158 big firms and calculated that CEO pay last year rose 27 percent.
In short, after a brief Great Recession interlude, corporate executive pay is cascading again — at the same time average American families, by the millions, are still facing foreclosures, frozen paychecks, and furloughs.
In fact, estimates Forbes, executive pay is now rising at least four times faster than the wages of average workers.
One major advocate for average workers, the AFSCME public employee union, last week announced plans to challenge America’s latest “indefensible” executive pay surge at the April 28 annual shareholder meetings of Pfizer and Johnson & Johnson, two of world’s most celebrated corporations.
Johnson & Johnson CEO William Weldon collected almost $29 million last year, after drug recalls cost the company $900 million. Pfizer’s now-retired Jeffrey Kindler ended his career with a paycheck close to $25 million, after a stint in the CEO suite that saw his company lose $68 billion in market value.
Activists at AFSCME and other groups have, over recent years, made corporate annual meetings a prime battleground against executive pay excess, and the Dodd-Frank financial reform legislation enacted last summer has handed activists a long-sought new weapon. Under Dodd-Frank, all major publicly traded corporations must now put their executive pay plans up for a shareholder vote.
But this now-mandated vote only rates as “advisory,” and corporate boards remain free to ignore what shareholders choose to “say on pay.” And early Dodd-Frank “say on pay” voting results, corporate governance analyst Eleanor Bloxham noted last week in Fortune, haven’t been all that encouraging.
So far, Bloxham points out, shareholder majorities have voted negatively on executive pay plans at only five companies, with only one of those five a significant national corporate player.
And after the financial crisis, Bloxham’s Fortune analysis points out, shareholders at big-time banks getting federal bailout dollars all had an opportunity, under the bailout legislation, to vote down executive pay plans. Not one big-bank CEO pay plan failed to gain a thumbs up.
Developments like these have other CEO pay critics looking for executive compensation reforms with a bit more bite. And the second-generation reforms these critics are advancing seem to be revolving, more and more, around federal tax dollars, both how these dollars get raised and how they get spent.
Under current law, corporations that lavish rewards on the top regularly receive billions in tax dollars via government contracts and subsidies. Corporations also regularly deduct off their taxes billions more, by declaring that the immense paychecks they stuff into executive pockets amount to “performance incentives.” The tax code lets corporations deduct all such “incentives” off their taxes.
These deductions add up. In the last fiscal year before Wall Street’s 2008 crash, corporations deducted $86 billion off their taxes for stock option incentives alone, note Harvard’s Richard Freeman and Joseph Blasi and Douglas Kruse from Rutgers in a new paper they released last month.
Average taxpayers, in effect, are subsidizing executive pay excess. So why not, analysts Freeman, Kruse, and Blasi suggest, turn the tables — and start using the tax code to discourage, not encourage, excessive executive pay?
In two narrow areas of corporate compensation, these scholars remind us, the tax code already plays this discouraging role. Ever since 1942, companies have only been able to deduct pension plan costs off their taxes if the benefits from these plans go to all company workers, not just executives at the top.
Corporate health care plans work the same way. If a company only lets high-ranking employees access a health plan’s benefits, the company can’t claim a tax deduction for the plan’s costs.
Freeman, Kruse, and Blasi want to see this basic principle extended to corporate “performance incentive pay,” to the billions in cash bonuses and stock awards that currently flow overwhelmingly, and sometimes exclusively, to top corporate executives and managers.
More specifically, the three academics are proposing that tax deductions for incentive pay only go to corporations that award “at least as much to the bottom 80 percent of their full-time workforce as they award to their top 5 percent.”
That mandate, Freeman, Kruse, and Blasi believe, would encourage corporations to share the rewards from their success — and discourage a status quo that funnels performance incentive awards to a “highly paid few.”
What if corporations don’t take the hint and continue that status quo? In that case, corporations would lose their tax deductions for incentive pay — and America’s taxpayers “would no longer be subsidizing the benefits to a small number of highly paid workers.”
The new Freeman, Kruse, and Blasi executive pay reform proposal spells out, with careful precision, just how Congress could structure the tax changes necessary to encourage “broad-based incentive compensation.”
The three, working with the Center for American Progress, have given lawmakers all they need to take a major whack at executive pay excess. Lawmakers now have the way. The rest of us now need to give them the will.
Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.