by Bob Lord and Emily McCloskey
This past May, The Wall Street Journal released a bombshell report on trends in American CEO pay. According to their analysis, in 2021, median pay for CEOs at American S&P 500 companies rose to a record-setting $14.7 million, with the 25 highest grossing CEOs earning $35 million and the top 9 earning a whopping $50 million.
Now, the Journal has published a new report which adds another shocking layer to the story of excessive CEO compensation in America. Despite consistent claims that corporate taxes will disincentivize behavior like hiring or research and development, there is one thing corporations are clearly willing to pay taxes for – executive compensation.
According to the Journal’s new analysis, those same S&P 500 corporations are shelling out more than ever in corporate taxes to continue lining the pockets of their C-suite executives. Specifically, over the past three years, roughly three dozen companies paid a combined total of just under $2.1 billion in corporate taxes on nondeductible compensation. For some companies, this made up a sizable portion of their entire tax bills. Tesla, for one, forked over $447 million in the three-year period for nondeductible compensation, which made up 40% of its total tax expense.
How did this happen? One of the few progressive pieces of the hugely regressive 2017 GOP Tax Cuts and Jobs Act (TCJA) limited employee compensation deductions to $1 million, capping the amount of executive pay that companies could claim as a tax deduction.
You would think that stripping tax deductions in this way would cool the hyperinflation of CEO pay in America, but the Journal’s findings show that this unfortunately didn’t happen. Tax break or no tax break, these companies will continue on the path of exorbitantly enriching their executives.
If S&P 500 companies were really concerned about maintaining their profit margins and lowering their tax bills as they say they are in every other facet of business, the reality is that they would be giving the money that they are using to engorge their top officers to their workers. By my own calculations, for every $100 a corporation dedicates to nondeductible executive pay, the corporation and its executive pay a combined $58.81 – a 58.81% rate – in federal and state taxes. On the other hand, for every $100 a corporation uses to increase a worker’s annual pay from $40,000 to $50,000, the corporation and its employee would pay a combined $26.19 – a 26.19% rate – in federal and state taxes. The rates are even smaller for companies that would choose to use the money to raise the pay of minimum wage workers to $15 an hour (roughly 23%) and/or to hire additional workers with annual salaries of $40,000 (roughly 20%).
Why do corporations pay their executives so handsomely even when it’s more cost effective for them to pay their workers more? Two words: corporate greed. Companies like to say that they pay their executives generously because of competition in the market to attract “top talent.” But the facts don’t bear out here. According to the Journal’s May report on CEO pay, in 2021, 6 of the 25 highest paid CEOs managed companies that actually oversaw decreases in shareholder returns. Moreover, the right of a business to deduct its ordinary and necessary business expenses is a bedrock provision of the tax code. The non-deductibility of exorbitant executive pay reflects the determination of a Republican Congress that pay in excess of $1,000,000 by large corporations should not be considered an ordinary and necessary business expense.
Indeed, what we see in excessive CEO pay is not about ordinary and necessary business expenses. Rather, it is all about ultra-wealthy corporate board members doing favors for their ultra-wealthy executive peers. Even when they’re slapped with tax bills to the tune of billions and even when executives don’t actually do a good job, boards will continue to shamelessly shell out for their own.
There are many reasons that corporations should end the shameful cycle of never-ending pay increases for executives and instead invest that money back in their workforce. First and foremost, it’s about fairness – in no world real or imagined can a CEO be “worth” 1000 times more to their companies than their average employee, and pay scales should reflect that. But it’s also about better business. Paying workers more might hurt companies’ bottom lines in the short term, but in the long term, they will be more profitable. Better-paid employees stay on the job longer, are more committed to their companies’ success, are more productive, and have more money to buy their companies’ products. And now, we can also say it’s because they will have smaller tax bills.
If the folks running America’s S&P 500 corporations were focused on efficiency, their decisions would reflect that it pays – literally – to pay workers more. But unfortunately, as things stand today, the folks running corporations are the ones receiving excessive compensation, and they’re in no hurry to cut their own pay.
There’s a fix for this problem. Congress could pass the Tax Excessive CEO Pay Act and condition the tax treatment of executive pay on the ratio of that pay to worker pay. Instead of merely setting the deduction for pay at an arbitrary dollar amount like $1 million, they should instead make the corporation’s tax rate dependent on the ratio of executive pay to worker pay. That will align the pay incentives of corporate executives with the betterment of pay for all workers, leaving both workers, and the companies that pay them, better off in the long run.
Bob Lord, a Phoenix tax lawyer and former congressional candidate, is senior adviser on tax policy at the Patriotic Millionaires.
Emily McCloskey is a Communications Associate at Patriotic Millionaires