Wall Street CEO Bonus Loophole

Sarah Anderson at Institute for Policy Studies writes about how the 1993 reform to rein in runaway CEO pay by capping tax deductions of executive compensation at $1 million created a loophole as it did not apply to stock options and other performance pay methods. More-performance-measured-income to executives paid out, the lower the company income tax presently.

What was the impact?

$2 billion in fully deductible performance bonuses by top 20 U.S. banks to their top five executives over the past four years at a 35 percent corporate tax rate resulted in a taxpayer subsidy of > $725 million or $1.7 million per executive per year.

On-the-hot-plate Wells Fargo Bank (WFC) between 2012 and 2015 received $54 million in tax subsidies for CEO John Stumpf bonuses. During those years, CEO John Stumpf’s bank faced $10.4 billion in misconduct penalties.

The same top 20 executives received ~ $800 million in stock-based “performance” pay, before stockholders were out of the red and the bank’s stocks returned to pre-2008 levels.

Jamie Dimon CEO of JP Morgan cashed in fully deductible $23 Million in bonuses in Feb/March 2010 while the nation was still reeling from the crisis. Since 2010 JP Morgan has received $28 billion in penalties for mortgage misconduct.

The same as Main Street bailing out Wall Street for their malfeasance, Main Street was also subsidizing Wall Street Executive bonuses. Some potential solutions:

Implement Sec. 956 of Dodd-Frank: Rigorous limitation by regulators of Bank excessive risk taking and the banning of excessive bonus based upon risk – “not yet been implemented and this proposal does not go far enough to prevent the type of behavior that led to the 2008 crash.” Sec 956 allows lenient bonus deferrals, weak stock-based pay restrictions, and discretionary enforcement left to bank managers.

Close the hedge and private equity loophole which allows private equity and hedge fund managers to pay a 20 percent capital gains rate on the bulk of their income rather than the 39.6 percent ordinary income rate. The Carried Interest Fairness Act of 2015 (HR 2889/S 1689)requires that the “carried interest” compensation received by private equity and hedge fund managers be taxed at ordinary income rates. Due to a lack of activity by Congress some states such as New York are implementing their own legislation to close the loop hole generating $3 billion in new revenue.