Tags: Reich | CEO | pay | performance

Robert Reich: Stop Subsidizing Sky-High CEO Pay

Friday, 19 Jul 2013 08:33 AM

By Michael Kling

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Outraged by skyrocketing CEO pay? You might be even more outraged to hear that your taxes are subsidizing their stratospheric pay levels.

Corporations deduct CEO compensation from their income taxes, causing others to make up the difference, says former Labor Secretary Robert Reich.

The good news is that we can stop subsidizing sky-high CEO pay by changing the tax rules, writes Reich, a professor at the University of California, Berkeley, on his blog.

Editor's Note:
Use This Single Loophole to Pay Zero Taxes in 2013

"This tax subsidy to corporate executives from the rest of us," Reich asserts, "ought to be one of the first tax expenditures to go, when and if congress turns to reforming the tax code."

That was almost accomplished 20 years ago, he recounts. While campaigning for the presidency, Bill Clinton said that if elected he'd end the deductibility of executive pay in excess of $1 million.

After he was elected, however, his advisors urged him to allow corporations to deduct executive pay over $1 million if the pay was linked to corporate performance, that is, company share value.

Reich notes that he was Clinton's only advisor who recommended sticking to the initial pledge without the performance loophole. However, Clinton agreed with the majority of his advisors.

Agreement that the executive pay rule has failed is widespread, according Reich.

For instance, Sen. Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee, has stated: "It was well-intentioned. But it really hasn’t worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese."

Reich lists some of the tricks companies use:

• They grant executives performance awards even if their company's stock rises only because the entire market is up;

• They backdate executive stock options to past share price dips to exaggerate subsequent upswings;

• They also set the performance bar so low that executives are almost guaranteed to beat the level.

A total of $121.5 billion in executive compensation was deducted from corporate earnings between 2007 and 2010, according to the Economic Policy Institute. About 55 percent of that amount was for performance-based compensation, Reich explains.

"Given all the games, it's likely much of this 'performance' was baloney."

A study commissioned by The New York Times found that the top 200 CEOs at public companies with at least $1 billion in revenue got a median pay increase of $15.1 billion in 2012, a 16 percent increase over 2011.

The findings show that shareholders are unable to convince corporate boards to control pay increases, according to The Times.

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2013

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