Shrinking corporate officer pay

By David Cay Johnston
September 16, 2011

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.

TOP-LEVEL SQUEEZE
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.

CALCULATED CLUES
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)

20 comments

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In my 32 years of professional experience, I’ve seen a lot of valuable executives and quite a few ones I strongly think had negative value because their overall effect on the organization was negative. They were infinitely overpaid.

Posted by possibilianP | Report as abusive

It’s going to get worse before it gets better. As the economy sinks, corporations may be forced to layoff everyone just to maintain CEO compensation at its soaring levels. Of course, that’s good news for CEOs… after they let everyone go, they can drop the office space leases (or put the facility on the market with a commercial real estate broker), and tell the CEO, “Go home, play golf, do what you do best… you’re on direct deposit, and your secretary will stop by your estate periodically to pick-up your dry cleaning.”

Posted by DisgustedReader | Report as abusive

That’s scandalous ! I didn’t know my collegues were suffering so much ;-)
Come on guys, there are people suffering so hard they don’t know how to get food on the table or a roof over their heads. Not the right time to start about the subject. Take a cut.

Posted by FBreughel1 | Report as abusive

The tears just well up in my eyes and overwhelm me. Will print it off and pass it out to the shanty towns we are growing here in Texas. Maybe they will find time to read it though the extra time dumpster diving since Food Stamps were cut leaves them less time to better their educations. Hell, 1/3 have graduated from college!

When change finally comes to this cesspool it is going to get very ugly between the poor (now over 1/2 the population) and these suffering executives.

Posted by txgadfly | Report as abusive

How about some European numbers? How many EU companies pay 40% of their profits in pay for their hired hands? No wonder they have outperformed American stocks for more than a decade.

We let an aristocracy rob the place as well as rule it. How can it not end badly for everyone? Think Romanoff Russia.

Posted by txgadfly | Report as abusive

As a 55 year old, who has worked in hard labor jobs since 16 years old, they should trade places with me for a day and then see if their cut in pay still looks so bad.

Posted by getinshape | Report as abusive

Consider that in year 2011 many CEO’s are paid IN TWO HOURS the average median YEARLY INCOME in the United States.

In those two hours that CEO may have:

* Sat on the John browsing stocks on his iPhone.

* Played a round of golf.

* Sipped a martini with a crony at a five star hotel nextdoor.

When those two hours are up BINGO he (less likely she) earned the average yearly employee income based on 2011 income statistics. When does he get to work? Please.

Posted by DisgustedReader | Report as abusive

Hmmm, I really don’t know what to think here. The CEO’s are making money off their corporate officers? Sounds familiar. The problem that I see is that CEO’s and their officers are being well paid for a job poorly done. Much like politicians with tax payer money, the corporate cronies are with the money of the shareholders. Gambling it away, and paying themselves very well. When your board is loaded up with all of your buddy CEO’s from other corporations which you sit on the board of, and you make a pact to pay each other well, there is little valid corporate governance, and pay is not comensorate with performance.

My suggestion? First eliminate the conficts of interests on the boards. The board members should be at large shareholders, people that represent the shareholders, not the interests of the officers. Second, dedicate that salaries are based off of a percentage of that corporations profits. When a corporation loses money, the officers have a deficit salary, and they not only don’t make any money…they don’t make any money until the deficit salary is made up.

I’m getting sick and tired of investing my money with companies that pay a pittance in dividends, and have little or no growth for years at a time. All the while the CEO is enjoying his perks on private jets, corner offices, prime tee times, and private estates. And don’t try to tell me he is stressed…I know stress, and there is not one CEO that knows what real stress is. And don’t tell me they are paid to make multi-million dollar decisions. There are many people that make those same decisions that don’t get paid near that amount, and they don’t complain about there pay. In fact, when is the last time you heard a CEO complain about being under paid?

Posted by ponderosa | Report as abusive

While it varies quite a bit, the compensation of officers as percentage of profits indicates a continuing ripoff of shareholders (the owners!!) of the corporation. As a shareholder, I see no excuse for this ever going over 10%. I am here assuming that the “officer” group does not include the worker bees – those who actually produce the goods and services. However, this article does point out that CEOs are a growing portion of the problem. CEOs do not need the money, most of them are motivated more by the power and prestige that comes with the job, and would not give up the job if paid much much less.

Posted by QuietThinker | Report as abusive

So, if I read this article right, the executive/CEO types are making only $ 30 million a year instead of the normal $ 32 million a year? It must be terrible for them and their families. Meanwhile, the entire country’s savings, retirement and investment values have fallen by 40%. I feel so sorry for the Wall Street types. (Caution, there is some sarcasm contained in this post)

Posted by Outpatient | Report as abusive

CEO pay is soaring; company profits are up; the US is on the verge of collapsing under the weight of its own debt; Medicare, Medicaid, and Social Security have been put on the chopping block; and yet the winning argument in the tax/debt debate is that the wealthy should not have to pay any more in taxes despite the fact that they’re currently paying taxes at historically low levels. In fact, Republicans want to lower taxes on the wealthy even further.

And to add insult to injury, most of the money that we’ve been borrowing from China and other foreign countries has been going into the pockets of the wealthy, the very ones who are being protected by our elected representatives from having to pay higher taxes. Defense contractors; the banking industry; Wall Street; the Healthcare Industry; the Oil Industry; them, and the affluent in general, are being protected by our government while the vast majority of Americans are being run through the economic meat grinder. They are extracting this money from us and sending it overseas.

It’s crazy. But what’s really crazy is that we put up with it. In fact, we just swept into Congress the Party who have made this insane tax dynamic the cornerstone of their ideology. Cut everything that helps the Middle Class and the poor and do everything that helps the rich get richer, as if trickle down economics really worked.

But in the name of bipartisanship, the Democrats are doing very little to change this dynamic. When it comes down to it, they aren’t going to do a whole lot to upset the apple cart. They may be opposed to it ideologically, but they’re even more opposed to biting the hand that feeds their campaigns. Who’s feeding their campaigns? Defense contractors; the banking industry; Wall Street; the Healthcare Industry; the Oil Industry; them, and the affluent in general.

I’m not against the rich. I’m against the rich who are using their money to corrupt our government in a way that enables them to get richer at the expense of my country.

It’s the corruption, stupid. Even before the economy, because the economy will never really be fixed for 99% of Americans until we get rid of the corruption in our government. It should be our #1 priority.

Until we do something to put an end to the corruption in our government, we are doing this to ourselves.

Posted by doggydaddy | Report as abusive

thanks for the mention of john snow-he seems to always be slightly ahead of the sinking ship as he was in setting up the pre-lehman explosion economy pre paulson-believe he then parachuted to a pe firm that had made some poor choices for investments as well-ahh the greed of american ceo’s which at times helps us but usually hurts us alot-a quick fix is the ratio of lowest paid/highest paid in a firm be held the same always and ratified by all boards

Posted by Conservastore | Report as abusive

Once again we seem to discuss this rip off every year as in the past ten years, with no change but for the worse for the share holders. Even worse, the corporations worldwide are starting to emulate this potentially explosive (in their consequences) inflated Chief Executive remuneration model, which are constantly reported and justified in mystifying terms for simple share holders to understand and act. There are still some company owners and chiefs who are reasonably compensated and I thankful to and feel sorry for them as they may deserve more recognition if not compensation. It is a pity that even if shareholders propose and vote for CEO pay limits, the board can ignore it – Antiskeptic

Posted by slnsimhan | Report as abusive

Time for some reforms to corporate law regarding compensation committees.

Posted by borisjimbo | Report as abusive

Let me get this straight. 1 for the officers, 2 for the shareholders? And we don’t consider that a mite high? Aren’t compensation committees supposedly working for the shareholders?

Given all the people with business skills in this country, couldn’t the shareholders do better with management teams who might work for a bit less?

Posted by LVTfan | Report as abusive

and this is while blowing $300,000+ per new job created?

Posted by inkom.com.au | Report as abusive

Were these figures “distilled” in a brewery. Even Mr.Johnston knows that the “average is far less meaningful than the “mean” or “weighted average”. Bur even using your average figure of $471,500 that is roughly 31 times the income of a full time minimum wage earner. Does this compensation include perks such as the use of a corporate jet, corporate vacation homes or borrowing from the corporation at below market rates. And what about deferred compensation or stock options?

It is interesting that you write this article just as President Obama proposes a ‘millionaire” tax. But not to worry, according to Mr. Johnston’s figures the average CEO has nothing to worry about so why the big outcry?

Posted by seattlesh | Report as abusive

@seattlesh, average and mean are the same; I suspect you seek the median (half more, half less). The data do not allow that computation or I would have calculated it.

Note to readers working at the IRS Statistics of Income division: adding a MEDIAN line to reports would be invaluable.

My articles were the first to expose the hidden subsidy in executives’ personal use of corporate jets, explaining the economics, history and side effects. You can read this also in chapters of my books Perfectly Legal (“Plane Perks”) and Free Lunch (“Without Even Asking” and “Beauty and the Bounty”).

You and some others here also seemed to miss the point of my column — that what is true of CEOs is not true of corporate officers as a whole.

The data are about corporate officers as a whole, who are for sure very well paid, but are not in league of the most overpaid CEOs, who I show with a specific example sometimes see their pay rise as shareholder wealth evaporates.

One implication of this new data is that executives at the very top are squeezing not just the rank-and-file (whose stagnant pay I have been documenting for many years) but ALSO those just below them.

So, please, carefully re-read from the start, especially the 6th and 7th paragraphs.

Posted by DavidCayJ | Report as abusive

Officer pay is going down a bit, but it is going up as a percentage of profits. That is the real story here. Concentration of wealth in the hands of the few and not the many shareholders.

Posted by Potatoe1 | Report as abusive

Potatoe1 — when you talk about the “many shareholders,” are you aware how concentrated the ownership of equity in publicly held companies and of privately held businesses is?

According to the 2007 Survey of Consumer Finances (published by the Federal Reserve Board), “EQUITY” — stocks, whether held directly, via mutual funds, retirement accounts or even trust funds — is distributed as follows:
Top 1%: 36.0%
Top 5%: 66.5%
Top 10%: 78.9%

The ownership of privately held businesses (“BUS” in SCF parlance) — importantly, a larger figure than “EQUITY”! — is as follows:
Top 1%: 62.7%
Top 5%: 88.1%
Top 10%: 93.6%

(Combined, those figures are 49.9%, 77.8% and 86.6%.)

It is true that 51.9% of us have SOME “EQUITY” but most of it is in relatively few pockets. However, your point about the distribution between shareholders and officers is quite accurate as well.

We ought to be more interested in the structures that permit corporations to — quite legally! — privatize value we all create together. THAT is where the real story is.

Posted by LVTfan | Report as abusive