Twenty leading U.S. banks collectively paid their top five executives $2 billion in tax-deductible bonuses between 2012 and 2015, according to a recent report examining Wall Street CEO pay.
That $2 billion figure works out to be a tax break valued at $725 million, or $1.7 million per executive per year, the Institute for Policy Studies (IPS), a progressive think tank, found.
“Taxpayers should not have to subsidize excessive CEO bonuses at any corporation,” report co-author and IPS Global Economy Project Director Sarah Anderson said in a statement. “But such subsidies are particularly troubling when they prop up a pay system that encourages the reckless behavior which caused one devastating national crisis — and could cause more in the future.”
At issue is the so-called performance pay “loophole” in current corporate tax law. The provision first started in 1993, when Congress limited the deductibility of certain executive pay to $1 million.
But the law provided an exception for performance-based pay, such as stock options, non-equity incentive plans and stock appreciation rights. As such, unlimited amounts can be deducted from corporations’ federal income taxes for costs associated with performance-based executive pay.
“Wall Street banks lost this lucrative CEO pay subsidy when they received taxpayer-funded bailouts in the wake of the 2008 crash, but only until they repaid the funds,” IPS’ report explained. “Many of them rushed to do so, borrowing in the private market in order to escape this and other public bailout-related pay controls. While homeowners and shareholders were still suffering, the banks were free once again to dole out massive bonuses and write off the entire cost, leaving ordinary taxpayers to make up the difference.”
Of the top 20 U.S. banks, Wells Fargo saw the largest taxpayer subsidy for executive performance bonuses between 2012 and 2015. The bank, which is currently embroiled in a scandal over the opening of fraudulent customer accounts, paid its top executives nearly $457 million in fully deductible performance pay, reducing Wells Fargo’s IRS bills by an estimated $160 million, according to IPS.
“The Wall Street CEO who received the most in tax-deductible bonuses is John Stumpf of Wells Fargo,” the report states. “Between 2012 and 2015, Stumpf pocketed more than $155 million in performance pay ($151 million in just the past three years). This one man’s bonuses translated into $54 million in tax subsidies for Wells Fargo.”
Since IPS released its report, Wells Fargo announced that Stumpf will forfeit $41 million in unvested equity awards, receive no bonus in 2016 and forgo a salary during an investigation into the bank’s sales practices. Independent members of the Wells Fargo board are conducting the probe.
Carrie Tolstedt, Wells Fargo’s former head of community banking, has also “left the company; will receive no severance; has forfeited unvested equity awards valued at approximately $19 million; will not exercise outstanding options” during the investigation and receive no bonus for 2016, the company said in a news release.
IPS, meanwhile, also found that that nearly $800 million in stock-based performance pay was provided to the top five executives at the leading 20 U.S. banks between 2012 and 2015.
The executives received the stock-based performance pay “before their firm’s stock had returned to pre-crisis levels,” the report states. “With shareholders who had held on to their stock still in the red, executives were reaping massive bonuses that their banks could then deduct off their taxes.”
The progressive think tank supports federal legislation to close the CEO bonus loophole, including the long-proposed Stop Subsidizing Multimillion Dollar Corporate Bonuses Act. The bill would limit the tax deductibility of executive pay to $1 million and eliminate the exception for commission- and performance-based compensation.
Read Progress Illinois’ past coverage of the legislation here.