Wall Street’s abusive, reckless, and at times criminal behavior caused the worst financial crisis and economic downturn since the Great Depression. But executive pay and profits at big Wall Street banks bounced quickly back and enjoy record levels today. In 2017, the CEOs of the top six banks were paid over $20 million on average, which was 272 times as much as their median workers are paid. Citigroup CEO Michael Corbat and JPMorgan Chase CEO Jamie Dimon make more in one day than their bank’s typical employee earns in a year.
Why should we begrudge CEOs their soaring pay packages? Because they are coming out of our pockets. First, the CEOs profit from us as customers — and not always honestly. Second, we subsidize their executives’ salaries with our tax dollars because bonuses are tax-deductible. And third, compensation in the form of stock-based pay encourages CEOs to take excessive risks to boost share prices, risking a financial crisis and taxpayer bailout.
There are two promising measures to rein in executive pay on Wall Street: the first is legislation to end the tax subsidy corporations get from the rest of us when they pay sky-high bonuses, and the second is a provision from Dodd-Frank that requires corporations to publicly-disclose the ratio between the salaries of their CEOs and their employees.
CEO Bonus Loophole
Current law sets a cap of $1 million on the amount that banks and other corporations are allowed to deduct for “performance based” compensation — per top executive — from the company’s taxable income. But the cap is only limited to a company’s CEO, CFO, and three other highest-paid employees. It does not extend to Wall Street traders, celebrities, and highly paid non-executives. As a result, banks and other corporations can deduct unlimited amounts from their taxable income for bonus compensation to these highly-paid individuals. Executive compensation experts have found that pay arrangements relying heavily on “performance pay” encourage managers to focus on boosting share prices in the short-term at the expense of long-term value. This tax loophole gives banks an incentive to perpetuate the reckless Wall Street bonus culture that was a key factor in the 2008 financial crisis.
According to the Institute for Policy Studies, the top 20 U.S. banks paid out more than $2 billion in fully deductible performance bonuses to their top five executives between 2012 and 2015, for a taxpayer subsidy of $725 million. When big banks and large corporations don’t pay their fair share in taxes, small businesses and working families have to pick up the tab. Fully closing the CEO bonus loophole would not only end this obscene taxpayer subsidy for multimillion dollar bonuses, it would raise tens of billions of dollars in revenue that could go towards investments in health, education, and infrastructure.
SEC Pay Ratio Disclosure Rule
Ten years after the financial crisis, and eight years after the passage of the Dodd-Frank Wall Street reform law, 5 of 12 mandatory executive compensation rules remain to be approved by the Securities and Exchange Commission. But thanks to the efforts of financial reformers and allies against fierce corporate opposition, a major victory was won in 2018: the SEC finally released a rule to implement a provision of the Dodd-Frank Act requiring companies to disclose the ratio of their chief executive’s pay to that of their median employee. This is the first time in US history that publicly traded companies in the US are having to disclosure their internal pay gaps. Disclosure provides an objective standard for measuring the reasonableness of a CEO’s pay, an important metric for investors and other stakeholders. This data is already helping efforts at the municipal and state government levels to link firms’ pay ratios to tax incentive structures that reward greater equity.
“CEO compensation surged in 2017”, By Lawrence Mishel and Jessica Schieder, Economic Policy Institute, August 16, 2018.
“A Hard-Won Victory on CEO Pay“, by Jim Lardner, Americans for Financial Reform, June 21, 2018.
“CEO Pay: Still Not Related to Performance”, by Dean Baker and Jessica Schieder, Center for Economic and Policy Research, June 2018.
“Portland Spurs Efforts to Rein In CEO-to-Worker Pay Gaps”, by Jacob Rund, Bloomberg News, June 1, 2018.
“Rewarding or Hoarding? An Examination of Pay Ratios Revealed by Dodd-Frank“, by the staff of Representative Keith Ellison, May 2018.
“10 years after the Great Recession, big banks are still making outrageous profits”, by Sarah Anderson and Porter McConnell, The Hill, April 30, 2018.
“CEO-Worker Pay Ratios in the Banking Industry“, by the Institute for Policy Studies and Public Citizen, Inequality.org, April 2018.
“Closing CEO Pay Loophole Doesn’t Make Up for Corporate Tax Giveaway”, by Sarah Anderson, Inequality.org, November 2, 2017.
“Another Wall Street Bonus”, by Bartlett Naylor, CitizenVox, May 1, 2017.
“Some Democrats in Congress Just Took a Stand Against Income Inequality”, by Take on Wall Street, Daily Kos, March 2017.
“Incompetent Corporate Managers: Raise Your Hands”, by Bartlett Naylor, CitizenVox, February 2017.