A report by the Institute for Policy Studies on high CEO pay and the low effective corporate tax rate is really just an amalgam of two pieces of data we already knew about. But it’s getting a lot of media attention because it presents the data in a new and interesting way.

According to the report, 25 of the 100 highest-paid corporate CEOs took home more in compensation in 2010 than their company paid in federal taxes. That’s a neat little stat, and it fits with some other information we’ve seen. For example, the most profitable of the 25 companies was General Electric, who received a notorious $3.3 billion tax refund, even while making $5.1 billion in pre-tax income. They also spent $41 million on lobbying, more than they did on taxes. CEO Jeffrey Immely took home over $15 million.

Other companies profiled in the report include Prudential, Verizon, Bank of New York Mellon, Boeing, Marsh and McLennan, Stanley Black & Decker, International Paper, Chesapeake Energy and eBay. CEOs at the 25 companies averaged $16.7 million in compensation, and averaged a $304 million tax refund. That’s on average global profits of $1.9 billion per company.

How did they manage this feat? Most of the companies, 18 out of 25, operated offshore tax havens to shield their income from Uncle Sam. 20 of 25, as mentioned above with respect to GE, spent more on lobbying than corporate taxes, and that lobbying has appeared to pay off for the bottom line. And most are paying their workers less relative to the boss – the gap between average CEO pay and average worker pay is up to 325-1. It was 263-1 in 2009.

IPS has another theory on the relationship between high CEO pay and low corporate taxes:

In annual shareholder financial reports, companies record an expense for the value of the stock options granted to executives at the time the options are granted. This book expense is calculated in accordance with accounting rules and is based on assumptions about when the options will be exercised and the stock’s trading price on those future dates.

But companies do not take the deduction for executive stock options on their tax returns until their executives exercise the options, usually years later. The amount of compensation the executive receives on the exercise date is often substantially more than the book expense of the options that was originally estimated. Because the tax deduction is based on the trading price of the stock on the actual exercise date, the tax deduction is often much more than the book expense that was recorded by the companies. They do not write off the added option expense on the profit statement for shareholders. The result: earnings reported to shareholders end up overstated and taxes end up reduced.

There’s actually a Senate bill (S. 1375) that’s been introduced to end this loophole, which would generate $25 billion in revenue over 10 years.

And at least one member of the House has taken notice. Elijah Cummings, the ranking member of the House Oversight Committee, called for hearings on CEO compensation, based on the findings in the report. I’ll put his entire letter to Chairman Darrell Issa on the flip, but here’s an excerpt:

There seem to be two different economic realities operating in our country today, and the rules of compensation in one world are completely different from those in the other. Most Americans live in a world where economic security is precarious and there are real economic consequences of failure. But our Nation’s top executives seem to live by a different set of rules [...]

As the principle oversight committee in Congress, we have a unique opportunity and responsibility to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today. We should also examine in detail why CEO pay and corporate profits are skyrocketing while worker pay stagnates and unemployment remains unacceptably high, as well as the extent to which our tax code may be encouraging these growing disparities.

“These 25 companies are extreme examples of how large corporations can get away with picking Uncle Sam’s pocket,” report co-author Scott Klinger said in a statement. “And while the CEOs clearly benefit, working and middle class families and small businesses are left to pick up the tab.” If this report can highlight the difference between the America of workers and the America of the ultra-rich, it will have done a good service.

Here’s that letter from Cummings to Issa.

August 30, 2011

The Honorable Darrell E. Issa
Chairman
Committee on Oversight and Government Reform
U.S. House of Representatives
Washington, D.C. 20515

I am writing to request that the Committee hold hearings on the issue of corporate executive compensation.

In 2008, this Committee conducted significant oversight work on the causes and consequences of the economic crisis. As part of that investigation, the Committee determined that the structure and method of determining Chief Executive Officer (CEO) pay rewarded excessive risk taking and short-term profits over long-term shareholder and corporate interests. At a 2008 hearing with Countrywide CEO Angelo Mozilo, former Merrill Lynch CEO Stanley O’Neal, and former Citigroup CEO Charles Prince, former Committee Chairman Henry A. Waxman stated:

There seem to be two different economic realities operating in our country today, and the rules of compensation in one world are completely different from those in the other. Most Americans live in a world where economic security is precarious and there are real economic consequences of failure. But our Nation’s top executives seem to live by a different set of rules.

The Financial Crisis Inquiry Commission reached the same conclusion. In its final report this year, the Commission stated:

Compensation systems—designed in an environment of cheap money, intense competition, and light regulation—too often rewarded the quick deal, the short-term gain—without proper consideration of long-term consequences. Often, those systems encouraged the big bet—where the payoff on the upside could be huge and the downside limited. This was the case up and down the line—from the corporate boardroom to the mortgage broker on the street.

As a result of the reckless and in some cases illegal actions of corporations that caused the economic crisis, millions of hard working Americans lost their jobs, and many of them continue to be unemployed or underemployed. In addition, “[n]early $11 trillion in household wealth has vanished, with retirement accounts and life savings swept away.”

Today, however, the largest U.S. corporations have returned to making record profits and rewarding their CEOs with lavish compensation packages. In 2010, CEOs at the nation’s largest companies were paid more than they were in 2007, “when the economy was booming, the stock market set a record high, and unemployment was roughly half what it is today.”

Although corporations and CEOs may have returned to their pre-crisis levels, with the support of billions of dollars in government bailouts, the circumstances of millions of working Americans continue to stagnate. The Washington Post reported that, according to research conducted by Andrew Sum, the Director of the Center for Labor Market Studies at Northeastern University, corporate profits accounted for 88% of economic growth in the 18 months since June 2009, but “wages and salaries accounted for 1 percent of that growth in the same time period.”

In addition to these indicators, tomorrow the Institute for Policy Studies will issue a report that raises additional concerns. The report, which I have been provided a copy of, states:

· Of last year’s 100 highest-paid corporate chief executives in the United States, 25 took home more in CEO pay than their company paid in 2010 federal income taxes.

· These 25 CEOs had an average compensation of $16.7 million, well above last year’s $10.8 million average for S&P 500 CEOs.

· Only 5 of these 25 companies paid any taxes at all. 18 of these 25 companies actually collected tax refunds from the Internal Revenue Service that averaged $304 million.

· CEOs in 22 of these 25 firms enjoyed pay increases in 2010. In 13 of these companies, CEO pay increased while the company’s income tax bill declined or its corporate tax refund expanded.

In contrast, the report states that the gap between CEO and average U.S. worker pay rose from 263-to-1 in 2009 to 325-to-1 last year.

Although Congress put in place some reforms relating to CEO pay under the Dodd-Frank Wall Street Reform and Consumer Protection Act, many of these provisions are still pending regulatory review and implementation.

As the principle oversight committee in Congress, we have a unique opportunity and responsibility to examine the extent to which the problems in CEO compensation that led to the economic crisis continue to exist today. We should also examine in detail why CEO pay and corporate profits are skyrocketing while worker pay stagnates and unemployment remains unacceptably high, as well as the extent to which our tax code may be encouraging these growing disparities.

Thank you for your consideration of this request, and I hope we can work in a bipartisan manner on this issue.