Last year, mostly because of stock options, the top 100 CEOs earned between $18 and $378 million. CEOs on the S&P 500 now average $13 million a year -- while over the past five years 64 major U.S. corporations only paid an average of 8.1% in corporate taxes to the U.S. Treasury.
And Warren Buffett's secretary still pays a higher tax rate than her boss. Income inequality and wealth disparity is at an all-time high, thanks to record profits gained from low wages and an skewed tax code. But yet, we're always hearing these CEOs bitterly complain. Why? What can the rest of us do to make them happy?
About Stock Options (CEOs and Shareholders are one and the same)
An "equity grant" is the issuance of an award, such as a stock option, to key corporate officers under a stock plan. A stock option grants the employee (CEO, etc.) the right to purchase a certain number of shares of the company's stock at a predetermined price (called the "strike" price). There is usually a waiting period before an employee can exercise their stock options once vested.
Many companies use employee stock options plans to retain and attract employees (and to preserve cash flow). The objective is to give the corporate executives an incentive to perform in ways that will boost the company's stock price.
If the company's stock market price rises above the "call" price, a CEO could exercise the option, pay the exercise price and would be issued with ordinary shares in the company. The CEO would experience a direct financial benefit of the difference between the market and the "exercise" prices.
If the market price falls below the stock exercise price at the time near expiration, the employee is not obligated to exercise the option, in which case the option will lapse. Restrictions on the option, such as vesting and non-transferring, attempts to align the holder's interest with those of the business shareholders (so they are one and the same).
CEO Stock Options are on the Rise
I repeat: The idea behind stock option grants is to give corporate officers the incentive to align their interests with that of the stockholders (again, they are one and the same). In the past, however, some stock option grants have been set at such low levels that executives ended up enriching themselves, not the shareholders.
Last year, mostly because of stock options, the top 100 U.S. CEOs earned between $17.9 million (Theodore M. Solso at CMI) and $377.9 million (Timothy D. Cook at Apple). And that's usually in ONE YEAR --- and they earn this year after year after year (and not during their entire career). And they are being more induced with stock options to earn more!
The trend toward performance-based pay using stock options for CEOs has been building for at least a decade. Pay consultant Farient Advisors says that 64% of the companies in Standard & Poor's 1500-stock indexes attached performance criteria to stock option grants in 2011, up from 20% in 2002.
According to the Wall Street Journal, there are exceptions to the trend. Oracle's Larry Ellison received compensation valued at $94.6 million in the fiscal year ended May 31, 2012, the vast majority through seven million stock options valued at $90 million.
The options carry no performance targets, but in its proxy statement, Oracle says the options align Mr. Ellison's pay with company performance because they will have value only if Oracle's stock rises. "When our stockholders are rewarded, our executive officers are also rewarded," the company says.
The stockholders (mostly large institutional investors) and executive officers are one and the same.
Ten Years of Tax Breaks: Where are the Jobs from the Job Creators?
I remember when I was once being paid an incentive to perform (doing "piece work" in a factory) when an average amount of "widgets" were created over a certain period of time and a quota was established by the management --- and then the employees could earn more money if they produced over and above the set quota ("increased worker productivity") until such time when too many employees began working too hard to get ahead. And then the company would again raise the bar and reset a higher quota for the employees to meet (like a hamster in cage spinning his wheel, getting nowhere fast).
That's another reason why employee's wages have been depressed for so long, because they didn't have union representation or anyone in Congress representing them either. Domestic jobs are out-sourced to other countries for lower wages, or in-sourced with H-1B VISAs to foreigners willing to work for less here (but being paid more than they would have in their own home country).
And if not in this way, part-time hiring is also on the rise. Read my post: ObamaCare® Loophole Creates More Part-time Jobs.The real unemployment rate, as measured by U-6, which includes part time workers who want full time work, sits at 14.6% --- which was the average in 2012.
How Far with the CEOs Go?
But going forward from here, with CEOs on the S&P 500 already earning 380 times more than their average employee (averaging $13 million a year), what will the CEOs do to further increase the value of their stock shares (and their own pay), besides just manipulating their employees' wages or by using profits to buy back their own outstanding company stock? What happens after all their "emerging markets" become too saturated to generate the revenues (and salaries) they've become so accustomed to? Can wages go any lower? Can prices go any higher? The CEOs certainly think so, and will be paid with stock options to do everything they can to make sure.
We already know that the CEOs will spend millions in campaign contributions and lobbyists to keep their taxes and the minimum wage low --- and to fight labor unions and to promote "right to work laws". But how much farther will the CEOs go to increase company profits for "their shareholders" (themselves)? Ralph Nader could probably tell us.
The CEOs and other executive officers of a company who are awarded with stock options (and bonuses from corporate "pools") --- those who are rewarded for "performance" for increasing the value of stocks for "their shareholders" with increased profits --- are usually themselves the shareholders, along with other institutional investors, such as the big banks, hedge funds and private equity firms (such as Bain Capital); and these same executive officers often sit on multiple boards of directors in each others companies.
The CEOs won't pay better wages or offer more benefits to their low-level employees, nor do they have to (by law) pay their share of corporate taxes. Over the past five years, 64 major U.S. corporations only paid an average of 8.1% in corporate taxes --- yet they complain about taxes as though the CEOs can't make an honest living and/or earn a fair living wage.
But I digress, because I assume that the major shareholders, such as the multi-billionaires on the Forbes Fortune 400 list, have the final say on CEO compensation.
Warren Buffett's Secretary Still Pays a Higher Tax Rate
It's also worth noting that after one year, after the CEOs realize their stock options as capital gains, the tax rate for long-term capital gains is 20% for those earning more than $400,000 a year ($450,000 if married) --- but that is still much less than the top marginal rate of 39.6% --- and there are no Medicare or Social Security taxes applied.
Although, starting in 2013, ObamaCare® did add a 3.8% sur-tax to capital gains, for a total of 23.8% tax on long-term capital gains. But that is still less than someone paying a "marginal" tax rate on regular wages. Someone earning $36,250 to $87,850 a year in hourly wages (or with a weekly salary) is in the 25% tax bracket. So Warren Buffett's secretary is still paying a higher tax rate than her boss.
Most people in the top 1% income bracket like Warren Buffett (unless they are paid to give a speech like Mitt Romney) usually earn most of their income with capital gains through stocks, dividends, rental income, real estate sales, precious metals (e.g. gold, silver, etc.), precious stones (e.g. diamonds, rubies, etc.), royalties, art collections, coin collections, wine collections, annuities, differed interest, etc. --- so their tax rate would be 23.8% --- minus any tax write-offs.
Mitt Romney had a $77,000 tax deduction for a horse, while someone else might only gets a $3,000 tax deduction for a real live human being (as a child tax credit). The top 1% has the best of ALL worlds, but yet I'm always hearing them complain. It's hard to watch a rich grown man cry. Isn't there anything at all that an abject poor person can do to make an ultra-rich person happy?