Al Jazeera America (blog), December 4, 2013
Compensation practices in both the banking and fast food industries reveal that the way these industries compensate both their executives and entry-level employees is costing taxpayers hundreds of millions of dollars, according to recent reports.
A report by the Institute for Policy Studies (ISP), entitled "Fast Food CEOs Rake in Taxpayer Subsidized Pay," examines the extent to which fast food companies are able to reduce their tax burden by exploiting tax loopholes for "performance pay." A second report from the UC Berkeley Labor Center takes a look at the number of bank tellers who receive public assistance and the subsequent cost to taxpayers. Taken together, the two reports paint a picture of compensation practices in the banking and fast food industries supported by millions of taxpayer dollars.
In 1993, a law was passed that capped the amount of executive pay that a company could deduct from its taxes at $1 million, with an exemption for performance-based pay in the form of stock options and stock grants. Proponents of the loophole contend that it incentivizes CEOs to act in the best interest of their companies and aligns the interests of executives with those of shareholders.
ISP's report revealed that in 2011 and 2012, the CEOs of the six largest publicly held fast food companies were paid more than $183 million in performance pay, reducing the amount of taxes owed by these companies by $64 million. The largest tax deduction went to YUM! Brands, which owns Pizza Hut, Taco Bell and KFC. According to ISP's findings, the performance pay to YUM! Brands CEO David Novak resulted in $33 million worth of tax savings for the company.
Many of the same fast food companies benefiting from the performance pay tax loophole have large numbers of low-wage employees using public assistance programs such as food stamps and Medicaid - at substantial cost to taxpayers. An October report from the National Employment Law Project found that families of fast-food workers received an average of $7 billion in federal assistance per year between 2007 and 2011, with YUM! Brands employees receiving an estimated $648 million. The study also found that the percentage of fast-food workers on public assistance was 52% during that period, more than double the percentage of the general workforce on public assistance.
If the $64 million in tax breaks the top fast food companies receive for executive performance pay were applied directly to the food stamp program, it would cover the average cost of food stamps -- $133.42 monthly -- for nearly 40,000 people for a year.
A recent report by researchers at UC Berkeley Labor Center found that, of the half-million bank tellers in the US, a third are on public assistance. The report's authors say that the cost of this public assistance to taxpayers is nearly $900 million, including $534 million through Medicaid and the Children's Health Insurance Program and $105 million in nutrition assistance. According to 2010 data from the Bureau of Labor Statistics, the median income for a bank teller is $11.59 hourly, or $24,100 annually.
Executive compensation in the banking industry is largely based on tax-deductible performance pay, though the cost of performance pay deductions to taxpayers for the industry as a whole has never been calculated. The financial crisis and subsequent bank bailouts did, however, bring significant scrutiny to the executive compensation practices of the country's largest banks.
Despite the intention of the performance pay loophole, CEOs in the banking industry have been able to shield themselves from the consequences of poor performance. IPS explains how the performance pay of Goldman Sachs executives was not negatively affected by the financial crisis:
during stock slumps, executives often receive boatloads of new options with lower exercise prices. In 2007, for instance, Goldman Sachs gave executives options to purchase 3.5 million shares. In December 2008, after the crash had driven Goldman shares to record lows, the bank's top executives received nearly 36 million stock options, ten times the previous year's total. This new grant positioned Goldman executives for massive new windfalls even if the bank's shares never regained their 2007 price level.
Several lawmakers have introduced legislation in 2013 to address the cost to taxpayers from the performance pay loophole. In August, Senators Jack Reed (D-RI) and Richard Blumenthal (D-Conn.) introduced S. 1476, the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act. The Reed-Blumenthal bill would remove all exceptions to the $1 million limit in tax deductions for executive compensation.
In his statement on the bill, Sen. Blumenthal said, "Corporations should be free to pay their executives whatever they wish, just not at the expense of American taxpayers -- many struggling to make ends meet."
On the House side, Rep. Barbara Lee introduced H.R. 199, the Income Equity Act of 2013. Rep. Lee's bill would eliminate tax deductions on executive pay that is more than 25 times that of the company's lowest-paid employee.