Analyzing CEO's Pay & The Corporate Income Tax

Thanks to a long time member of our group for sending along the article below re twenty five public corporations who paid more money to their CEOs than they paid in federal corporate income taxes.  This article plays right into the class(less) warfare being promoted by the hostile anti-American media & motivates the wealth envy that is destroying America.  The article presents all of the wrong incentives for going forward, unless being presented for a nation that has accepted stagnation & decline.  The economics presented are woeful.  We need to return to being a country that is based on individual achievement & not one with a goal of making everyone a government dependent – the path we are flying down.  BO leads us down this path by design. 

With regard to CEO pay - any company should be able to pay their employees whatever they want.  In the case of crony capitalism if the stockholders are so disinterested (like the majority of Americans are about politics) then the operating officials & Boards really have temptation put right in front of them (like politicians do every day) & most would conclude they were fools not to partake of the spoils.  How many people do you know, including yourself, if only given that opportunity would refuse to play this game?

Most of you know I was in the engineering-construction business for 33 years building chemical plants all over the world.  In my company the first project undertaken after I retired suffered a $25 million overrun not to mention the lost revenue of market share of products produced later than scheduled.  Now had I stayed with the company & been paid $5 million per year the company would have come out way ahead from what happened had I delivered the project on time, within budget, & for the technical integrity specified as I had every project I ever started – so who is to judge what is the proper compensation especially when it is no ones' business except the owners of the company.

Gary Schwartz explains class envy when he writes "How many of us seek wealth but condemn those that have it?  Think back to the Panic of 1907. JP Morgan (who pledged large sums of his own money – note from me), in a sense, bailed out the nation , but was the nation grateful?   Far from it -- the public wanted Morgan pulled down to size."

With regard to corporate income taxes it is important to understand that people pay the corporate income tax – not corporations.  Let's start with the most basic of finance & accounting equations: Revenue – Expenses = Profit.  Now in order to pay tax on profit corporations must first collect revenue so that if the corporate income tax is derived from revenue it is the consumer who pays this tax when he buys the product – this covers the revenue part of the equation.  If employment or wages are reduced to cover the corporate income tax then unknowing workers pay the corporate income tax – this covers the expenses part of the equation.  If neither of the foregoing is immediately possible then the share holders, including individuals & pension funds will have reduced payouts of dividends or capital gains which covers the profit portion of the equation.  It is amazing to me how many people I know bad mouth corporations like Exxon Mobil but receive a portion of their retirement income (pension) from the company – talk about not knowing what is going on.  But please understand that in no case will the corporation pay any corporate income tax – only consumers, employees, or shareholders do.

Let's illustrate the above principle by reviewing GE's much maligned corporate income tax return this past April that resulted in GE paying no corporate income tax – a fact that infuriated many people starting with Bill O'Reilly.  GE's tax return totaled 24,000 pages which in & of itself tells you quite an expense & effort went into preparing it.  It should not make you happy, but please be assured that we did pay the compliance cost of the lobbyists & tax attorneys who prepared GE's monstrous return (these cost were embedded in GE's products' prices) - people who were paid to create (with the help of Congress) or find the loopholes that let GE not pay any corporate income tax in America. It is just that GE found paying the lobbyists & tax attorneys more advantageous & less costly than paying the corporate income tax – a sound business decision & one that saved every consumer, employee, & pension fund holder money as described above.

Professor Frederic Jelen, in his (my) classic textbook entitled Cost & Optimization Engineering, explains the problem with all of the above that is a product of our income tax system when he gives the following example regarding depreciation accounting – "How depreciation is determined over the years influences the apparent profit for the individual years.  This is true for other expenses that can be allocated over the years.  For example, one power company lost an entire generating station because of a landslide @ the river edge.  Instead of taking the entire loss in one year, the company preferred to allocate the loss over a number of future years.  This decision affected the apparent profits for many years ahead."

Peter Drucker summed all of this up as follows: "What it (earnings per share) really represents is 'taxable earnings.' It is what is left after all the charges that the tax collector accepts as deductible. But this figure is a purely arbitrary figure that has little or nothing to do with business performance."

Professor Drucker went on to say "it is not the company that makes a profit that rips off society but the one who doesn't."

Top CEOs Earn More Than Their Firms Pay in Taxes

By Douglas McIntyre Posted 8:00AM 08/31/11

Twenty five CEOs of America's top companies earned more money than their companies paid in taxes last year, according to a report by the Institute for Policy Studies Executive Excess. The think tank "researched the 100 U.S. corporations that shelled out the most last year in CEO compensation. At 25 of these corporate giants," the Institute "found the bill for chief executive compensation actually ran higher than the company's entire federal corporate income tax bill."


Companies on the list include Verizon (VZ), International Paper (IP), Prudential Financial (PRU), GE (GE), BNY Mellon (BK), Boeing (BA), Marsh & McLennan (MMC), Stanley Black & Decker (SWK), Chesapeake Energy (CHK), and Ebay (EBAY).


The report also challenged the gap between CEO pay and those of the average workers at the companies they run. "The gap between CEO and average U.S. worker pay rose from 263-to-1 in 2009 to 325-to-1 last year."


The report was particularly hard on companies that use tax-avoidance techniques such as money held "off shore" to "accelerate depreciation." GE has already been criticized in the press, particularly by The New York Times, for the level of taxes it has paid in recent years.


The Institute for Policy Studies report says that Congress must take action to close the tax loopholes that allow companies to pay low taxes in comparison to their earnings and even listed potential government remedies to corporate tax dodging. They include: closing "numerous loopholes that facilitate tax dodging through abuse of tax havens" and mandating "that corporations take the same deduction for stock-based executive compensation on their tax returns as they do in shareholder financial reports." Legislation has already been introduced in Congress on both matters.


The Institute also said that laws which give shareholders little voice in corporate governance shield CEOs from questions about pay packages. But because the companies are public, one of the most important opinions should be those of the shareholders. GE shares, for example have underperformed the S&P 500 during the last year. But, shares in eBay and Verizon have done better by the same measure. The stockholders of the firms that did outperform the market may not care about what the companies in which they own shares paid to Uncle Sam.