Shrinking corporate officer pay
By David Cay Johnston
The views expressed are his own.
It’s time to prick the popular image of ballooning executive pay with some sharp new facts.
As a group, corporate officers — executives with broad authority to act on the company’s behalf, not just follow orders from the CEO or some other boss — are making less, not more, my analysis of newly available tax data shows.
This is in sharp contrast with the thoroughly documented excesses at the very top revealed through analysis of disclosures to shareholders. The new tax data includes CEOs, but the few score of wildly overpaid ones at the biggest companies become statistically insignificant within the universe of nearly a million corporate officers covered in the new tax data.
Many CEOs get paid far beyond what economic theory says is necessary to motivate them. Worse, a fair number enjoyed soaring pay while shareholders saw their wealth dwindle, as with John Snow when he ran the CSX Corp railroad company. When Snow left to become Treasury secretary his pay had grown 69 percent, while the price of CSX shares fell as much as 64 percent, just one of many disconnects between CEO pay and performance.
But among the nearly one million corporate officers in the United States, this new data, never available before, show that the overall story is one of shrinking pay.
One implication of this is that executives at the very top are squeezing those just below them. This fits with anecdotal information many mid-level executives have provided me over the years. But it may also mean that many companies are not properly filling out their tax returns, neglecting to fill in Schedule E as required, understating officer pay, especially at nonpublic companies.
Corporate officers earned less total pay in 2008 than they did a decade earlier in 1998, even though there were more company officers at firms with more than $500,000 of revenue, the threshold for reporting by name to the IRS. In all but two years since 1998, total pay was higher than in 2008.
Average pay looks to be significantly smaller than way back in 1994.
Measured in 2008 dollars, the 990,077 corporate officers whose compensation was reported on tax returns made $466.8 billion in 2008, down slightly from $471.4 billion in 1998.
In 2008 their average compensation was $471,500, down about 13.5 percent from an estimated $545,100 in 1994.
These figures, which I distilled from traditional IRS statistical reports plus a valuable new IRS data set, run counter to the image of the bloated corporate pay packages that have been a staple of spring news reports for two decades. I feel a special duty to analyze the new data because I wrote many of the front-page New York Times reports that directors of some of the largest companies told me later made them realize that they were paying their CEOs far more than they thought. This new data provide a much broader picture not only of corporate pay, but also of profitability, than available before.
BORING TITLE, BUT…
The new data come from a document entitled “2008 Estimated Data Line Counts / Corporate Tax Returns.”
That boring title belies a wealth of information that stock analysts, tax lawyers, accountants, government revenue estimators and policy wonks of all kinds can extract from its 246 pages.
The IRS has long published similar reports on individual income tax returns. The new corporate report is one of several I have for which I have agitated over the years to provide a more rounded and thorough source of information about incomes, assets and tax burdens. (Partnerships next, please!)
The report consists of the various Form 1120s and their schedules, showing how many times each line was filled out. What makes the report valuable is a second set of the same pages showing the total amount of money entered on each line, pages fittingly tinted green.
Existing IRS corporate tax reports have for years shown us that fewer than 2,600 megafirms own 81 percent of all U.S. corporate assets. Another 21,000 firms control most of the rest, leaving just 5.6 percent of corporate assets that are divvied up among the more than 5.8 million remaining corporations.
The new data report, combined with the old, can be mined for trend lines about assets, liabilities, compensation, fringe benefits, profitability and other information needed to make smart investments and devise public policies that comport with reality, not rhetoric.
The figures on 2008 average corporate officer pay were calculated from the new report. To estimate average corporate officer pay in 1994 I calculated that the number of officers grew in tandem with the number of corporations, a rough proxy for sure. I tried some other proxies and the results were in the same range.
The 2008 data show that while almost three million corporate officers show up on company tax returns, only 990,077 Social Security numbers do and of those only 838,551 show up as being paid. That may suggest some owners took no pay in the Great Recession year of 2008, but it also hints at how many officers serve multiple corporations.
The officer pay data show huge variations. Just 70 officers of 1,660 Real Estate Investment Trusts averaged $5.2 million in 2008, while 832 officers of 7,670 property and casualty insurers averaged $3.8 million. At the other end, more than 2.1 million officers of S Corporations averaged just $107,403, though many of them must be officers of multiple corporations.
The new data also show that in 2007, the last peak economic year, the total pay of corporate officers was almost one percent smaller than in 2000, the previous peak year. Compare this with the stock market, whose 2007 peak adjusted for inflation was about 17 percent lower than in 2000.
Since 1994, business receipts have grown about 50 percent faster than profits, tax data show. Since corporate officers are supposed to run companies efficiently, the narrowing margin on sales is an indicator of poorer performance and thus may partially explain why overall their pay is smaller than in the 1990s, a fact nobody knew until just now.
Many CEOs continue to enjoy pay out of sync with performance, but the more important story appears to lie in the diminishing compensation of the vast majority of corporate officers, the people you never hear about as a group. (Editing by Howard Goller)