by Bud Meyers, published March 8, 2015
Corporate earnings, in many cases, are taxed lower than executive pay packages — which are also tax deductible as “employee wages”. It’s a win-win situation for the CEOs and other boardroom members, because they get paid with stock-options, which are taxed as “capital gains” — which is much lower than the top marginal rate for regular hourly wages and salaries.
In addition, these companies are using “stock buy-backs” to increase the value of their stock-option pay packages, rather than actually invest in the company or pay their regular employees better wages. And to do this, these companies have been borrowing money to buy back their shares, because interest rates are so low — making it a win-win-win situation for corporate execs.
Whenever you hear a CEO say, “I have a fiduciary duty to our investors”, they aren’t just talking about huge institutional investors or retirees trading from home online at Etrade, TD Ameritrade or Charles Schwab. The CEOs are speaking for themselves as well — because their executive compensation packages often include (if not mostly include) company shares as “incentives” to do whatever they can to raise their company’s share prices. They are setting their own salaries, year after year after year — even when they bomb at their jobs.
So a CEO’s real “fiduciary duty” is to pay themselves first. In the past several years, profits have been increasingly paid back to shareholders, rather than invested in hiring more people and/or paying their employees better. Instead, companies have been borrowing in order to buy back their own company stock, which not only boosts their company’s stock price for investors — but also for company executives, who are paid with stock-option grants as “performance pay“.
Forbes: “It’s increasingly common for common-man honchos to volunteer for a nominal $1 salary. And they may not want a cash bonus, either. Stock growth and capital gain is a lot more attractive and is taxed much more favorably … Facebook founder and CEO Mark Zuckerberg is now the company’s lowest-paid employee, according to its latest proxy filing. Zuckerberg — worth $27.8 billion mostly in Facebook stock — requested an annual wage of $1 in 2013, joining the ranks of a handful of other very wealthy CEOs who take a symbolically negligible base pay.”
And companies have been borrowing money to buy billions of dollars worth of stocks to make those shareholder payouts, because with interest rates so low, it’s a relatively cheap way to push stock prices higher. And that may be why some had pushed so hard for “quantitative easing” (QE) — and why they are so worried about the Fed raising interest rates:
Confessions of a Quantitative Easer: (Wall Street Journal) — “I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”
Waiting for the $3 trillion payoff? (Al Jazeera) –“Excess [reserves] have exploded from $267 billion in October 2008 to $2.2 trillion in September 2013. Banks aren’t willing to lend the money out or because there simply isn’t the demand for the loans that could be created. Either way, the banks don’t have to lend excess reserves to realize a [profit] because the Federal Reserve pays 0.25% interest on them.”
Continue reading Excess Profits Funneled to CEO Pay Packages