WASHINGTON — U.S. CEOs, along with private equity and hedge fund managers, should face steep income tax increases to help bring their compensation levels in line with European norms, according to a new study.
The 20 highest-paid U.S. corporate CEOs each made an average $36.4 million in 2006 in salary, bonus, and stock and other options, nearly three times the $12.4 million their European counterparts each made on average, but much less than the average $657.5 million each of the 20 highest-paid private equity or hedge fund managers made last year.
“The private equity boom has pushed the pay ceiling for American business leaders considerably further into the stratosphere,” according to the study by the Washington-based Institute for Policy Studies, a public policy research center, and United for a Fair Economy, a Boston-based social advocacy group, which collected pay data from various media and research sources.
The CEOs of 386 of the largest U.S. companies each earned an average $10.8 million in 2006, more than 364 times the pay of the average American worker, while the top 20 private equity or hedge fund mangers made 22,255 times the pay of the average U.S. worker, the study said.
“But modern economics, in reality, do not require excessive business executive pay to function,” the study said. “If it did, then the business executives that American executives compete against in the global marketplace would be just as excessively compensated as American executives. They aren’t.”
The “vast rewards” that go to U.S. CEOs are “not an inevitable unfolding of marketplace dynamics, but a marketplace failure. Markets that fail need to be corrected,” according to the study. It suggested, among other proposals, reducing the “unconscionably wide” pay imbalance by:
• increasing the top marginal tax rate on high incomes to between 50% and 91%, a level of that existed from the 1950s to the early1980s;
• denying government procurement contracts or economic development subsidies or tax breaks to companies “that pay their top executives over 25, 50, or even 100 times what their lowest-paid workers receive”;
• capping tax-deferred executive pay at $1 million;
• eliminating tax subsidies for excessive CEO pay as a business expense, or capping the tax deduction to 25 times the pay of the company’s lowest-paid worker; and
• increasing taxes on private equity and hedge fund executives to the 35% rate for ordinary income, instead of the 15% capital-gains rate they now pay on a substantial part of their earnings.
Corporate focus
Although the study suggested applying at least some of the tax proposals to reducing high private equity and hedge fund pay, its focus was on compensation for CEOs of U.S. corporations.
The study underscored another imbalance, regarding pensions. CEOs of Standard & Poor’s 500 companies each retire with an average $10.1 million in a supplemental executive retirement plan, the study said. But “in 2004, only 36.3% of American households headed by an individual 65 or older held any type of retirement account,” and those “that did exist, on a per-household basis, averaged only $173.552 in value, a miniscule 1.7%” of the value of the average CEO’s SERP account.
The study also found that, on average, the 20 highest-paid leaders of U.S. non-profit organizations each made $965,698; of the federal executive branch, including the president, $198,369; of the U.S. military, $178.542; and of the U.S. Congress, $171,720.
“Every market, of course, sports a ‘going rate,’” the study said. “Try to collect significantly above that ‘going rate,’ if your skill be computer programming or selling real estate, and you’ll likely get nowhere quick. But the market for leadership doesn’t seem to work that way.” U.S. CEOs “are capturing far more compensation for their labors than individual leaders in other fields who appear to hold the same exact leadership skill set.”
The pay gap has widened. In 1980, the average U.S. CEO pay was 40 times that of the average American worker.
