New study finds an obscure loophole helping CEOs get rich on taxpayer dollars

ByJames Dennin

A special loophole created under President Bill Clinton incentivizes massive CEO pay at the expense of taxpayers, according to a new study from the Institute for Policy Studies.

The study by authors Sarah Anderson and Sam Pizzigati was released Wednesday.

The loophole, Anderson explained in a phone interview, dates back to a 1993 reform under President Bill Clinton that was meant to try and reduce the gap between what CEOs make and what their employees make — a gap that's 10 times wider than it was 50 years ago, according to the Economic Policy Institute. 

CEO pay was a hot-button issue at the time, Anderson said, and Clinton proposed a $1 million cap on how much of their compensation was tax deductible in order to address the problem.

That way, companies could still pay their executives whatever they wanted to, but particularly high salaries would be taxed and funneled back into public services. 

The researchers estimate that the taxpayer subsidies meted out to the CEOs at the 20 top U.S banks alone amounted to more than $725 million between 2012 and 2015, enough to hire 9,000 elementary school teachers.

To qualify for the loophole, all you have to do is pay your executives in stock, which is considered performance-based because the executive has an incentive to make sure that stock gets more valuable; or tie the cash payments to "performance targets." 

That loophole encouraged what's called "short-termism," in which executives focus on boosting the stock price "by any means necessary," Anderson said, even when their "behavior could be bad for the country and the company." 

To use one example, the executives at Lehman Brothers and Bear Stearns — which went bankrupt and narrowly avoided bankruptcy, respectively — pocketed $2.4 billion in "performance-based" pay in the eight years that led up to the financial crash in 2008.

"The potential for such huge jackpots means you're going to encourage reckless behavior," Anderson said. "But taxpayers shouldn't be subsiding that."