A Surprise Strike
on Stealth Wealth

A Senate panel has voted to fix a first-time-ever cap on the paycheck dollars that CEOs can 'defer' — and shield from taxes. Will Congress go along? For the new Democratic majority, an early test.

January 22, 2007

By Sam Pizzigati

The nearly 50 million working Americans currently with 401(k) plans know all about how “deferred compensation” works. If you have a 401(k), you can have a chunk of your paycheck set aside and parked in a special account where that chunk can grow, tax-free, until you retire and claim it.

Most Americans with 401(k)s also know that these “deferred compensation” plans come with limits. Under the law, 401(k) plans can only shield so much of your pay — $15,500 this year, for everyone under 50 — from taxes.

Here’s what most working Americans don’t know about deferred compensation: Over the past quarter-century top corporate executives have been able to defer, into tax-free pots, millions of dollars a year, not through 401(k)s but through personalized pay deferral plans open only to top corporate brass.

Last week, in a Capitol Hill move that caught corporate lobbyists by surprise, a Senate panel moved to place a $1 million cap on the annual pay CEOs and other top execs can park away tax-free.

This week that proposed cap will likely move to the Senate floor. What happens next, in the Senate and then the House, may well define just how much clout Corporate America holds in the new Democratic-majority Congress.

What happens next may also split the movement to end excess in America’s corporate suites.

Why such high stakes? Deferred compensation has emerged, over recent years, as what may be the single most important perk in CEO pay land.

“There isn’t a company out there of any size that doesn’t have an extensive deferred-compensation arrangement,” Robert Willens, a tax analyst at Lehman Brothers, told Bloomberg News last week.

Indeed, Patrick McGurn, a corporate pay expert with Institutional Shareholder Services, told the Washington Post, many top execs are now having “the lion’s share of their compensation” deferred.

And just how much does that “lion’s share” total? No one really knows for sure. Corporations haven’t had to reveal, until this year, just how much executive pay they’re actually deferring.

We do have, from news reports, some anecdotal evidence about what has already been deferred. In 1997, for instance, the New York Times revealed that Coca-Cola’s former CEO, Roberto Goizueta, accumulated more than $1 billion in his deferral accounts.

Executive pay deferral plans can operate, legally, without annual limits because these plans, unlike 401(k)s, carry no special privilege. In a bankruptcy, creditors cannot seize pension and 401(k) assets. Executive deferral plans enjoy no such protection. In theory, the dollars in these plans sit at risk. If a company goes belly up, or gets gobbled up, an executive could lose every deferred dollar.

But corporate boards have moved to eliminate this risk. Boards simply reimburse executives for the cost of insuring their deferred pay stashes. One example: CSX, the transportation company, gave CEO John Snow $421,000 to offset the cost of insurance that Snow, who later became George W. Bush’s second secretary of the treasury, bought to guarantee his deferred pay should CSX be taken over.

Corporate board thoughtfulness on deferred pay goes well beyond these sorts of insurance subsidies. Corporations don’t just sit on the money executives divert into their deferred pay accounts. They pay interest on it, at above-market rates. Back in the 1990s, for instance, General Electric CEO Jack Welch annually earned an automatic — and sweet — 14 percent on his deferred pay dollars.

Capping executive pay deferrals at no more than $1 million a year, as the Senate Finance Committee voted last week to do, would jack up federal tax revenues at least $810 million dollars over the next 10 years, committee staff estimate.

Corporate lobbyists have already begun mobilizing to make sure that doesn’t happen. And they have some unlikely allies. Some prominent figures in the corporate accountability community last week blasted the deferred pay cap initiative, and, in the process, opened up to public view a deep and fundamental philosophical split among CEO pay reformers.

That split in a nutshell: reformers who think that some CEOs deserve their stratospheric pay versus reformers who believe that no CEOs deserve to take home hundreds of times more than what their workers earn.

Nell Minow, the widely quoted shareholder rights activist who runs the Corporate Library, falls squarely in the let’s-reward-CEOs-who-perform camp. Last week, she came out swinging against the Senate Finance Committee cap.

”The U.S. Congress should not be in the business of deciding how much executives make,” Minow contended. “They should be in the business of making sure that boards can do an effective job of tying pay to performance.”

But other reformers believe strongly that all Americans, not just corporate boards and shareholders, “have a stake in how corporations pay their top executives,” as the Institute for Policy Studies and United for a Fair Economy noted last fall in Executive Excess 2006, the latest edition of their annual CEO pay survey.

The huge rewards companies dangle in front of their CEOs, these groups note,  give these top execs a powerful incentive to do whatever they can to up corporate earnings — and that whatever they can often includes squeezing consumers, outsourcing jobs, and axing pension plans.

“Why should we let shareholders be the ultimate arbiter on the size of CEO rewards,” Executive Excess asks, “when these rewards can and do create incentives for CEO behaviors that hurt people who aren’t shareholders?”

The Senate Finance Committee $1 million deferred pay cap, to become law, will have to overcome more than opposition from corporate lobbyists and reformers like Minow. The cap sits in the middle of a legislative tug-of-war between the House and Senate.

The Senate Finance panel adopted the cap as an add-on to the Senate’s version of the minimum wage increase the House passed earlier this month.

Senators who support a higher minimum wage don’t believe they have enough votes to get an increase through the Senate without coupling the minimum hike with tax breaks for small business. The Small Business and Work Opportunity Act of 2007 that Senate Finance Committee chair, Max Baucus from Montana, ushered through his panel last week includes $8.3 billion in such business tax breaks.

To offset that $8.3 billion, the measure also includes an assortment of measures to plug loopholes that let America’s wealthy avoid taxes, everything from penalties on rich Americans who renounce their citizenship to the $1 million annual cap on deferred pay.

The minimum wage bill the House passed includes no tax breaks for business — and no loophole plugging either — and House Democratic leaders have repeatedly rejected attempts to mix a new minimum wage mandate with business tax breaks.

House leaders, press reports last week indicated, will eventually accept some add-ons to their minimum wage legislation. Whether these add-ons end up including a cap on executive pay deferrals has now become a tantalizing political sideshow that just may, in the end, upstage the main event.

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Sam Pizzigati edits Too Much, an online weekly on excess and inequality.