Do CEOs Make More than Their Companies Pay in Taxes?

  • Share
  • Read Later

In a new report by the Institute for Policy Studies, 25 of the 100 highest paid CEOs earned more last year than their companies paid in taxes. Not surprisingly, the report has gotten a lot of traction in the media; the Wall Street Journal, the New York Times, and Reuters snatched it up. But more interestingly, Felix Salmon declared the report to be total bupkis.

Why? According to Salmon, the problems with the study are twofold: For one, he says, its title is misleading. And second, the study’s evidence is weak.”The Massive CEO Rewards for Tax Dodging,” as the study is dubbed, implies that CEOs get paid more as a result of their companies avoiding taxes. And to Salmon, it also implies that the more a company dodges taxes, the higher their CEO’s pay. From the study, as quoted by Salmon:

Of last year’s 100 highest-paid corporate chief executives in the United States, 25 took home more in CEO pay than their company paid in 2010 federal income taxes.

These 25 CEOs averaged $16.7 million, well above last year’s $10.8 million average for S&P 500 CEOs.

And Salmon’s response:

Do you see what they did there? The initial set of CEO was the 100 highest-paid CEOs in the country. They then took 25 of those CEOs, and instead of comparing their pay to the pay of the other 75 CEOs in the group, they compared their pay to the average pay for a CEO in the S&P 500. This proves nothing: 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.

Judging by the information quoted by Salmon, the title does seem like a stretch. It doesn’t prove that the more a CEO is paid, the more the company avoids taxes, or vice versa. So what if 25 of the 100 highest-paid CEOs earned more than their companies’ federal income taxes? Smaller S&P 500 companies with proportionally well-paid execs could be avoiding their taxes, too, enough so that the CEO’s pay would add up to more than the corporate taxes paid. All this information tells us is that some CEOs are being paid more than others, and some of the highest paid ones work for companies that probably don’t pay much in taxes.

(MORE: Three Top CEOs Call it Quits: What Do Executive Exits Say About the Economy?)

But if you read into the study (the lines Salmon cites above are actually just bullet points from the study’s executive summary), the researchers flesh out a valid point: Paying CEOs more can lower corporate taxes. Why? Because most CEOs get a good chunk of pay in the form of stock options. Companies record the expense for the expected value of the stock option at the time the options are granted, the study explains, and then they postpone the accorded tax deduction until the CEO cashes out, which often occurs years down the road when the value of the stock – and the tax deduction – is much higher. It’s a big loophole, and one Senator Carl Levin is trying to close with a bill he introduced in July.

As for Salmon’s second qualm, he makes a good point. The evidence of the study fails to clarify whether these CEOs actually make more than their companies pay in taxes. Salmon:

The lowest-paid janitor, at those 25 companies, makes more than the company pays in taxes. The driving force behind the IPS result is entirely a function of how IPS calculates the corporate effective tax rate, and the ease with which that can go negative. It has nothing at all to do with CEO pay. (The IPS ignores deferred taxes, which is justifiable; it ignores taxes paid to foreign governments, which is less so, in an era of global corporations operating in dozens or even hundreds of tax jurisdictions.)

Salmon is right to point out the wobbliness of calculating effective tax rates. For obvious reasons, figuring out what corporations pay in taxes to foreign governments is no easy task. Of course, there is little doubt that, along with CEO stock options and tax deferrals, lower foreign tax rates are often used by corporations to lower their effective tax rate. That said, we don’t know whether the taxes paid by these 25 companies, when accounting for foreign taxes, is actually lower than their CEOs’ pay.

But Salmon’s biggest mistake, I think, is going after the media, and the New York Times in particular, for the way it reported the study. He criticizes the NYT for writing the following:

The authors of the study, which examined the regulatory filings of the 100 companies with the best-paid chief executives, said that their findings suggested that current United States policy was rewarding tax avoidance rather than innovation.

Considering the study’s explanation of various forms of tax avoidance, including CEO pay, this statement actually holds up. It’s a good thing Salmon actually linked to the study so I could figure that out. As he says:

This is one good reason, then, for every news organization to link to reports they’re writing about — doing so gives their readers the opportunity to see for themselves whether the report stands up to scrutiny.

Salmon may have skipped the part of the paper about CEO stock options, or maybe that information didn’t serve his point. Either way, it’s a good reminder that media write-ups, including Salmon’s, rarely tell the full story.

Roya Wolverson is a writer for TIME. Find her on Twitter at @royawolverson. You can also continue the discussion on TIME’Facebook page and on Twitter at @TIME.

0 comments
Sort: Newest | Oldest