Last year, 25 of the 100 highest paid CEOs in the country earned more than their companies paid in federal income tax, according to a report from the Institute for Policy Studies, a Washington think tank. The IPS study also found that many of the companies spent more on lobbying than on taxes as well.
Democratic Representative Elijah Cummings, a ranking member of the Committee on Oversight and Government Reform, called for a hearing on executive compensation after reading the IPS report. In a letter to the committee’s chairman, Republican Darrell Issa, Cummings asked that the committee “examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today.” He also asks that the committee investigate “why CEO pay and corporate profits are skyrocketing while worker pay stagnates and unemployment remains unacceptably high,” and “the extent to which our tax code may be encouraging these growing disparities.”
In its report, IPS chose only to compare CEO pay to current U.S. taxes paid, excluding foreign, state, and local taxes, as well as deferred taxes, rationalizing that deferred taxes may or may not ultimately be paid. IPS chose to compare CEO pay to current U.S. taxes paid because they are the closest approximation in public documents of what companies actually paid last year.
The average compensation for the 25 CEOs earning more than their companies spent on taxes last year was about $16.7 million, compared to a $10.8 million average for S&P 500 CEOs. One of the executives topping the IPS list is eBay (NASDAQ:EBAY) CEO John Donahoe, who made $12.4 million while his company reported a $131 million refund on its 2010 current U.S. taxes. Boeing (NYSE:BA) CEO Jim McNerney earned $13.8 million last year while his company paid only $13 million in federal income taxes. Boeing also spent $20.8 million on lobbying and campaign spending last year. General Electric (NYSE:GE) CEO Jeff Immelt earned $15.2 million in 2010, while GE got a $3.3 billion federal refund and spent $41.8 million on lobbying and political campaigns.
Most of the companies paying more to their chief executives than the government did so through legal methods that manipulated the law to their benefit. In fact, two-thirds of the firms studied were able to keep their taxes low by setting up offshore subsidiaries in tax-haven countries like Bermuda, Singapore (NYSE:EWS), and Luxembourg, while the rest benefited from accelerated depreciation.
While shareholders tend to look favorably upon companies that are able to improve earnings by keeping tax bills low, Chuck Collins, an IPS senior scholar and co-author of the report, thinks “it’s an exposure of weakness in a company if their profitability is dependent on their accounting department and not on making better widgets.” He also says that companies making the list, which IPS has been putting together for 18 years, often find themselves facing bigger problems down the line. Among some of the companies making the list in the past are Tyco, Enron, and WorldCom.