Bank CEOs get big, fat bonuses thanks to ’93 tax loophole
A 1993 tax reform under President Clinton capped the deductibility of executive compensation at $1 million a year. And the 2008 bank bailout banned large bonuses to executives at those financial institutions getting taxpayer loans.
So how did the chief executive of Wells Fargo, John Stumpf, collect $155 million in “performance” pay between 2012 and 2015 even as the bank he runs paid more than $10 billion in penalties for various acts of misconduct?
Nor was he alone among bank CEOs getting massive payouts in the post-crisis period.
JPMorgan Chase chief executive Jamie Dimon, for instance, cashed in $23 million in stock compensation in 2010, as the bank’s stock was down 15% from precrisis levels in the midst of the foreclosure crisis. The firm would go on to pay more than $28 billion to settle charges of misconduct in mortgages and other transactions.
These massive bonus payouts benefited from a loophole in that 1993 rule that allowed companies to still take tax deductions for stock options and other “performance” bonuses.
The loophole not only allowed board members to continue outsize compensation for the chief executives who appointed them but, as the Institute for Policy Studies said last week in releasing a new report, “fueled an explosion in CEO pay.”
While the bank bailout itself blocked this type of compensation, the ban lasted only until the banks repaid the bailout loans. Of course they rushed to pay these loans back, even if it meant borrowing other funds in the private market.
So even as shareholders, let alone clients, continued to suffer the consequences of bad bank management, these CEOs collected huge bonuses subsidized by taxpayers.
The tax subsidy alone for that $155 million Stumpf received, IPS calculates, was $54 million.
Between 2010 and 2015, IPS found, the top executives at 20 leading banks collected nearly $800 million in pay still eligible for tax deductions under this loophole because they were related to performance targets like total shareholder return. This was well before shareholders saw the stock price return to its precrisis level.
“These forms of compensation are supposed to ensure ‘pay for performance,’ ” the IPS study says. “In reality, they have encouraged the kind of reckless behavior that caused the 2008 crisis by creating the potential for unlimited jackpots with little downside risk.”
In fact, because this loophole enables a company to reduce its overall tax bill with these generous payouts, the study notes, “it has served as a perverse incentive for excessive pay.”
And this excessive compensa- tion quickly resumed after the crash as those 20 banks were paying out more than $128 billion in fines for financial misconduct.
The ban on performance pay in the bank bailout was far too short, the IPS says, because the bailout itself enabled the executives to benefit from the windfall of taxpayer support.
“In effect, those most responsible for the crash were best-positioned to rebound,” the study says.
The Washington-based think tank, which produces an annual report on excessive executive pay, urged Congress to close this loophole with legislation already introduced in the House and Senate that would simply eliminate the exemption for performance pay and cap tax deductibility for all forms of compensation at $1 million.
Specifically with regard to Wall Street, the IPS study says, regulators could also move toward tougher implementation of a provision in the Dodd-Frank financial reform that allows them to ban bonuses that encourage excessive risk-taking.
In a comment letter on the rule sent to bank regulators this summer, IPS project director Sarah Anderson said the restric- tions imposed so far — such as a short deferral of performance compensation or provisions for clawbacks — were too weak.
In general, the IPS study says, regulations should encourage narrower gaps in pay between the CEO and average worker and bigger rewards for longer-term goals to discourage “short termism.”
The IPS statement notes that Hillary Clinton, early in her campaign for the Democratic presidential nomination last year, pledged to “reform” executive compensation to eliminate these short-term incentives, but she has not explicitly said she would close the tax loophole for performance bonuses.
However, closing the loophole would be a way, the IPS authors suggest, to correct the “1993 policy mistake” by President Clinton that “costs taxpayers billions of dollars per year and perpetuates the reckless Wall Street bonus culture.”
Loopholes like this don’t happen by accident.
Bill Clinton’s Labor secretary, Robert Reich, has since related that he was the sole person to object when other economic advisers encouraged the new president to exempt performance-related compensation as he fulfilled his campaign pledge to limit tax deductibility on executive pay.
The result has been the explosion in CEO bonuses and widening of the gap between executive and worker pay.
“As income inequality continues to rise,” IPS’ Anderson, coauthor of the new report, urged in a Politico op-ed last week, “Hillary Clinton must fix her husband’s mistake and close this egregious loophole.”
A loophole in a 1993 rule allows companies to still take tax deductions for stock options and other “performance” bonuses.