Good News/Bad News/Good News Again for CEOs

By Scott J. Wenner

The Associated Press reported earlier this week that compensation for chief executive officers of companies listed in Standard & Poor’s 500 increased by 8.8 percent in 2013 – the fourth consecutive increase in total compensation after a decline in 2009, the midst of the financial crisis and recession. Even more striking, however, are the numbers. In 2013, the median compensation package for an S&P 500 CEO crossed the $10 million mark for the first time, totaling $10.5 million.

The size of the jump is attributed by compensation experts to the substantial rise in the stock market since its nadir in 2009. The gains in 2013 were in the range of 30 percent. Ironically, critics of executive compensation practices after the 2008-09 market debacle may be largely responsible for the size of the CEO compensation jump since the time of the stock market’s recovery began. Their complaint was that incentives such as cash bonuses and stock options were not aligned with company performance, and that sound governance and compensation practice should place greater reliance on stock bonuses, which at least theoretically rise and fall with a company’s performance. Now one of the reforms sought by corporate governance experts may be responsible, at least in part, for a jump in CEO compensation that is certain to draw even further criticism over the level of CEO compensation.

The Other News

On May 28 the California State Senate voted on the revolutionary SB 1372, gaining a majority but falling short of the two-thirds super-majority required to increase taxes under the state constitution. SB 1372 was intended to attack perceived income inequality (or, as put by its sponsors, to “stop outrageous CEO pay”) using the state corporate tax code as a carrot and a stick. If enacted, SB 1372 would have recalibrated income taxes on public corporations doing business in California based upon how their CEO pay compared to the median pay received by their entire workforce. SB 1372 was favorably voted out of both the Senate Appropriations Committee and the Senate Committee on Governance and Finance.

At present California’s corporate tax rate is 8.84 percent of a company’s net profits. SB 1372 proposed to replace that flat rate with a sliding scale that would have reduced the corporate tax to 7 percent where a company’s CEO is paid at or below 25 times its median worker pay. A public corporation that pays its CEO more than 100 times the median amount earned by the corporation’s workers would have seen a corporate tax increase. Companies compensating their CEOs 400 times more than the average worker would have seen a corporate tax increase of nearly 50 percent, to a 13 percent rate.

The bill also would have imposed tax penalties on companies that off-shored and outsourced work. Any publicly traded company that had reduced the number of full-time workers on their payroll by more than 10 percent while increasing the use of contract and foreign workers would have found their tax rate hiked by 50 percent. An analysis of SB 1372 by the Senate Committee on Governance and Finance noted that the California Franchise Tax Board expressed concern over the constitutionality of the bill under the Commerce Clause of the U.S. Constitution, because it could appear to improperly favor U.S. over foreign commerce.

Not surprisingly, the California Chamber of Commerce placed the bill on its list of “job killers” if passed. Other critics warned that passage would prompt more businesses to flee to more hospitable environments. Supporters cited, inter alia, a study of the Economic Policy Institute, which observes that in 1965, CEOs were paid 20 times what their median employee made, but by 2012, that ratio had risen to 273 to 1.

 The Future of SB 1372

While likely dead for this legislative session, another vote this session is technically a possibility, as reconsideration was granted that keeps the bill alive. While Republicans were unanimously opposed, the 19 to 17 vote in favor of passage included five Democrats who voted against the bill and four Democrats who did not vote. If supporters can successfully whip other Democrats, the bill could pass this session.

While there is no comment publicly available as of yet, it would appear more reasonable to assume that SB 1372 will not come up for another vote this session. While the populist theme of the bill fits neatly into the emerging Democratic agenda for this election year, questions over its constitutionality, its dramatic nature, and simple uncertainty at this early stage over how the idea would work, all make it difficult to anticipate that at least 8 of 9 the Democrats who opposed or did not vote can be flipped into the “aye” column, thereby sending the measure over to the Assembly for its approval.

Stay tuned on this one.