New IPS Report: CEO Pay exceeds corporate taxes

By Bartlett Naylor and Dorry Samuels

Flickr photo by Infrogmation

Prepare to be ill: Of the 100 highest-paid CEOs in the United States, 25 of them made more money than their company paid in 2010 federal income taxes. In its 18th annual executive compensation survey, the Institute for Policy Studies found that “the people who run corporations . . . are reaping awesomely lavish rewards for the tax dodging they have their corporations do.”

Simultaneously with today’s release of “The Massive CEO Rewards for Tax Dodging,” Rep. Elijah Cummings has called on Chairman Darrell Issa of the House Committee on Oversight and Government Reform, “to examine the extent to which the problems in CEO compensation that led to the economic crisis continues to exist today.”

Consider results from Ford Motor Co. CEO Alan Mulally. He earned $27 million in 2010 and the company reported income of $4 billion. But the company whose motto is “built Ford tough” decided Uncle Sam had billed Ford enough and paid no taxes in 2010.

How can profitable companies pay so little in federal tax? IPS examines several artful tax dodges, such as tax havens that afford transfer pricing. American firms set up shell companies in foreign countries with low tax rates. The company then assigns ownership for certain assets such as a technology or drug patent to this low-tax country. That division then charges the U.S.-division for the use of that patent, often at “inflated costs,” IPS explains. These inflated costs are then deducted from US taxes, while the profits from the foreign-based division are, by design, hardly taxed. “Adding insult to injury, a coalition of corporate tax dodgers is now asking Congress to reward their tax avoidance with a deeply discounted five percent tax rate if they bring these funds back home where many of them started.”

Insurance company Aon Corp. led the list in foreign tax haven subsidiaries with 128 separate foreign divisions. The company paid CEO Gregory Case $21 million in 2010, which happened to be the same amount of pre-tax profit reported to shareholders. The company paid $16 million in 2010 taxes.

Tax dodging requires lobbying. IPS found that of the 25 companies that paid their CEO more than they paid Uncle Sam, 20 also spent more on lobbying than in taxes. General Electric led this list, spending $42 million on campaign contributions and lobbying expenditures. GE infamously paid no taxes in 2010.

In his letter to Chairman Issa, Cummings, who is the ranking Democrat on the oversight committee, explains, “As the principle oversight committee in Congress, we have a unique opportunity and responsibility to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today. We should also examine in detail why CEO pay and corporate profits are skyrocketing while worker pay stagnates and unemployment remains unacceptably high, as well as the extent to which our tax code may be encouraging these growing disparities.”

These IPS reports issue from the experienced pen of Sarah Anderson, who also co-authored the previous 17 annual IPS executive compensation surveys. Anderson directs the Global Economy Project. Scott Klinger and Sam Pizzigati, among other IPS veterans, also provided counsel for this report.

The IPS report highlights that corporate contributions to the federal budget have fallen steadily since the end of World War II, when they accounted for about a third of all revenue. Now, corporations account for less than 10 percent of federal revenue.

The IPS report also reviews remedies, including those meant to empower shareholders to reign in their CEOs. For example, the report found that Stanley Black & Decker led the list of CEO pay among these 25 firms, spending $35 million for the services of John Lundgren. Under his supervision, the company reported a pre-tax loss of $183 million. Shareholders registered their concern with this imbalance through a newly authorized say-on-pay vote (a new policy from the important Dodd-Frank legislation), which is an advisory referendum at every public company on the executive compensation package.

At Stanley Black & Decker, shareholders representing 61 percent of the vote opposed his pay package.

Corporations aren’t sitting quietly in time-out because of such infractions. They’re filing lawsuits to combat shareholder rights. See, for example, the U.S.Chamber of Commerce lawsuit against the proposed rule to allow larger shareholders to nominate directors to corporate boards. Corporate lobbyists have convinced the House financial services committee to abolish a provision, yet to be implemented, that requires the CEOs pay to be listed as a multiple of the median-paid employee in shareholder reports. IPS, along with Public Citizen and Americans for Financial Reform stand in solidarity to defend these and other executive compensation reforms.

Read Public Citizen’s recent report analyzing some of the over-the-top pay practices we’ve found (i.e. hedge fund manager David Tepper making President Obama’s annual salary every 14 minutes). While you’re at it, sign our petition calling on Wall Street to stop engaging in pay practices that incentivize risk.

Bartlett Naylor is Public Citizen’s financial policy advocate. Dorry Samuels is Public Citizen’s press office coordinator.