The leading association for the stock and executive compensation profession
Join a professional community 6,000+ members strong
Continue your investment in your professional development and community
Our member care center is here to assist you
Country-specific guidance for stock plan design and administration
Connect with a chapter in your area
Learn more about and engage your peers
Attend an NASPP event for unbeatable professional development and networking
Ask, find and provide answers to burning industry questions
Professional development to keep you at the top of your game
Expert industry perspectives and guidance for your daily work
Enrich you career and discover new opportunities
Be there for the 27th annual event Sept. 16-19, 2019 in New Orleans!
A new study reporting that some CEOs make more than their companies pay in taxes has been making a splash in the media lately. Today I offer some comments on the study.
Executive Excess 2011: The Massive CEO Rewards for Tax DodgingThe study looked at the 100 highest paid CEOs in the US and found that 25 of them earned more than their companies paid in taxes. The study also found that the average pay of the 25 CEOs exceeded the average pay of CEOs at all Fortune 500 companies, but, as one criticism of the study points out: "any subset of the 100 highest-paid CEOs in the country is going to have higher average pay than S&P 500 CEOs in general," so this isn't exactly groundbreaking.
The study also emphasizes that most of the 25 companies received tax refunds. Maybe I'm missing something here, but I thought getting a tax refund means you paid too much in tax, the IRS earned interest on your money all year, and then gave your excess payment back without interest at the end of the year. The companies that didn't get a tax refund were the clever ones because they earned interest on their money all year, rather than the IRS--they aren't necessarily paying their CEOs any less.
Compensation Apples to Tax Oranges
One problem I have with this study is that CEO pay isn't directly related to the company's tax bill. The two amounts really have nothing to do with each other. In fact, amounts paid to the CEO are an expense to the company; expenses reduce the company's profitability which in turn reduces the amount the company pays in taxes.
Companies that aren't profitable don't pay any taxes. If CEO pay shouldn't exceed the company's tax bill, does this mean that CEOs at companies that aren't realizing a profit shouldn't be paid anything? That's really going to put a damper on the start-up market.
Don't get me wrong, I agree with the principle that many CEOs of public companies are paid excessively--I'm just not sure that the company's tax bill is the appropriate yardstick by which we should determine what is excessive.
Is Senator Levin Behind This?
The study includes a special side bar (on pg 7) that explains how stock options contribute to this problem by producing a tax deduction for the corporation that differs from the expense recognized for the option--something Senator Carl Levin has been trying to change for years (see my August 9 blog, "Senator Levin, Still Trying").
The study says that "The amount of compensation the executive receives on the exercise date is often substantially more than the book expense of the options..." I take issue with this statement. I've never seen any data to back it up, I don't see any data backing it up in this study, and I know that many options end up underwater or result in a spread at exercise that is less than the grant date fair value. In fact, I'd love to see an analysis comparing grant date fair value to spread at exercise for a wide range of stock options at a wide range of companies, if anyone out there wants to take the project on.
CEOs Pay Taxes Too
One reason why compensation results in a tax deduction for the company is that the individual receiving the compensation pays taxes on it. So, while the company might be getting a tax break, the CEOs are still paying tax, probably a lot of tax.
NQSO exercises are certainly subject to tax. The US corporate tax rate for large public companies is around 34% to 35% (at least according to Wikipedia--I know nothing about corporate tax rates). The highest federal marginal income tax rate in the US is 35% and I have to believe that the CEOs in the study are paying tax at this rate (plus they are paying FICA taxes and the company is paying matching FICA taxes on the income). So whether the company pays tax on the income or the CEO does, it seems like the tax revenue is about the same (maybe slightly higher when the CEO is paying the tax because of FICA).
For example, let's say that a company earns a profit $100 million and the CEO of the company holds an NQSO with a spread of $1 million. If the CEO doesn't exercise the option, the company pays tax on $1 billion. If the CEO does exercise the option, the company pays tax on $99 million, but the CEO pays tax on the $1 million spread--at possibly a slightly higher rate than company would have paid. Tax revenue for the US federal government is about the same either way.
NASPP "To Do" ListWe have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing "to do" list for you here in my blog.
More Year-End Updates
In late October, I blogged about updates to the Social Security wage cap, Form 1040, and late filings o...Read More
U.S. Supreme Court: Railroad Company Stock Options Aren’t Taxable for RRTA Purposes
Clarification: The original version of this blog entry may have given readers the impression that the Supreme Court ruling exempted stock options at railroad companies from ...Read More
Say No to Withholding Taxes for Outside Directors (and Other Nonemployees)
There have been a couple of questions posted in the NASPP Discussion Forum lately about withholding taxes for outside directors or other nonemployees, so I thought this would make a good topic f...Read More
Two Wins on Share Withholding Litigation
Two courts have recently decided in favor of the defendants in suits brought by plaintiffs’ attorneys. The suits allege that transactions in which shares were withheld to cover taxes on RS...Read More
What would you do if you got an email from your CEO, asking you to provide a report of taxable income, including employee IDs—stat? A) Respond with the requested information as quickl...Read More