In a bid to deflate ballooning CEO pay packages, a senior Senate Democrat is seeking to limit the tax benefits for companies that dole out billions of dollars worth of stock options to their top execs.
Sen. Carl Levin of Michigan said that the legislation he proposed yesterday would put an end to the double standard that allows companies to deduct more from their taxes than the stock option expenses that show up on their books.
A Senate investigation found that a group of companies, including Apple, Cisco Systems, Monster.com and others, legally reported $218 million in stock-option expenses on their balance sheets – but deducted a whopping $1.26 billion from their taxes for those same options.
“By eliminating this outdated and overly generous corporate tax deduction, we would eliminate a tax incentive that encourages corporate boards to hand out huge executive stock-option pay, which, in turn, fuels the growing chasm between executive pay and the earnings of rank and file workers,” Levin said yesterday.
Levin said CEO pay at large U.S. corporations these days is nearly 400 times the pay of the average worker – up from 300 times in 2004 and 100 times in 1990.
Fueling that jump is a late-1990s surge in the popularity of stock options – a pay perk that gives recipients the right to purchase company shares in the future at a preset price.
Levin said undoing the tax break would generate as much as $5 billion to $10 billion a year in additional tax revenue. He failed with similar attempts to change the tax code in 1997 and 2003.
But this time around he might have more success because of the public outcry over bloated executive pay packages and the desire by Democrats to find new sources of tax revenue.
Apple founder Steve Jobs was the highest paid CEO last year. Though he received a nominal annual salary of only $1, restricted stock and stock options boosted his pay to $646 million.
Rounding out the top three were Occidental Petroleum’s Ray Irani, who took home $321.6 million, and InterActive Corp.’s Barry Diller, who racked up $295 million.
Options come with “an exercise price” that’s typically equal to the stock-market price of the shares on the day they’re granted.