Billions in Welfare: Cash for Corporations and Their CEOs

Many Americans take umbrage at the word "welfare," immediately associating the term with individuals who want handouts more than honest work. However, when talking about government gimmes, few consider the billions of dollars given to some of the some of the biggest public companies over the course of the last 20 years.

Given our high unemployment rate, it's far more difficult to justify the belief that individuals receiving government benefits are simply taxpayer money sponges. Americans who are looking for work or taking part-time jobs out of desperation certainly may need some government help just to get by.

The description "working poor" exists for a reason. But what about the working wealthy, who -- one way or another -- siphon resources from the rest of us?

What's ours is theirs. And what's shareholders' is theirs, too. Sometimes, it seems like everything is theirs, and our government helps them have it.

The picture of weak competition in the marketplace: competing for contracts
The Institute for Policy Studies recently released a 20-year analysis of CEO pay, "Bailed Out, Booted, Busted." The report highlights egregious examples of pay for nonperformance. It also covers how corporations and their top managements receive what can be called major government assists.

Of the 25 companies whose CEOs ranked high on IPS' 20-year analysis, five turn up on the list of the 100 biggest government contractors.

Lockheed Martin, United Technologies, IBM (NYSE: IBM  ) , General Electric, and Honeywell are the specific companies identified in the review. All told, these companies have collectively raked in $671 billion in federal contracts within the time frame.

Given the federal government's role as a significant benefactor to companies like these, it does have a cap of $763,000 in base pay for each CEO. However, in an epic fail, bonuses and stock options aren't included in that ceiling.

The loophole that weakens the fabric
There are other ways chief executives can push more of a burden onto ordinary taxpayers; somebody has to foot the bill for public services. Gaping loopholes allow chief executives to bank benefits. One allows companies to deduct unlimited amounts related to stock options and other ways CEOs make big bucks.

IPS underlines the fact that this creates an environment in which the higher a CEO's compensation is, the less the taxman can take. Meanwhile, the Economic Policy Institute calculated that tax-deductible portions of such pay shrank federal Treasury collection by $30.4 billion between 2007 and 2010. Those were significant years in terms of economic struggles -- and financial burdens -- faced by regular Americans across the nation.

The report highlights the ways that CEOs' compensation benefited from this loophole across the board, not just contractors' leaders' pay. IPS also made a list that illustrated overlap in two areas: the 25 highest-paid CEOs and the top 100 U.S. government contractors. IBM takes the cake, having made both lists for 11 years. General Electric has had simultaneous rankings for eight. United Technologies has made it for six years, and Lockheed Martin comes close behind with five years.

One recent event brings the tenure issue to the forefront. Amazon.com (NASDAQ: AMZN  ) recently won a coveted CIA contract worth $600 million. Longtime government contractors have balked. IBM has specifically fought the decision, citing its lengthy contractor status.

Amazon is fighting back, which some say has more to do with its efforts to prove itself as a contender in this area than with the contract itself. Amazon's entry into this area is a double-edged sword, but it would also upend some of the old-school companies that have gained hundreds of billions from their long tenures as contractors.

Reality checks and balances
The IPS report includes a scorecard that points out several ways outrageous CEO pay could come back to earth, particularly when poor performance and distorted competitive playing fields create costs that shareholders -- and citizens -- shouldn't appreciate.

In my last column, I touched on a pending Securities & Exchange commission rule that would finally require disclosure of the CEO-to-worker pay ratio at public companies. Yet another remedy would be, of course, closing the loophole that allows many chief executives to take in even greater amounts of money.

The Stop Subsidizing Multimillion Dollar Corporate Bonuses (S. 1746) and the Income Equity Act (H.R. 199) bills aim to close the kind of loopholes that shield a precious few Americans from paying significant tax bills on their sizable income.

Vote for change
Some shareholder resolutions take aim -- a few quite successfully -- at some of the biggest issues in corporate governance and CEO pay. In coming years, shareholders will hopefully vote for more and more shareholder resolutions that seek to control outrageous CEO pay. That includes us.

The fact that some pay puts more of a burden on taxpayers is an issue all Americans should think about. Shareholders should think about it even more.

One of the safest ways to view long-term investing is to buy and hold great companies for the long haul. The ones that can siphon off government goodies in various ways aren't exactly bastions of the truly market-based competitive landscape.

We haven't even touched on lobbying and political expenditures, either. There are many ways corporate managements can, and do, distort the marketplace -- granted, with the government's help.

Regardless, welfare comes in many forms. While people rail about the will (or lack thereof) to fully participate in a workplace that should value hard work, performance, and free enterprise, many gigantic companies aren't exactly playing fair. This dubious form of welfare is taking from many and giving to the few.

It's not good for long-term shareholders, and it's not fair for regular taxpayers.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.


Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2013, at 8:19 PM, SkepikI wrote:

    Its not good for anybody, employees, customers, shareholders, taxpayers. It keeps enterprises that should be stronger, weak and unwilling to become more efficient and productive, the record of A123, Solyndra, Revolt, SolarWorld, just to name a few are very compelling. One can only hope GM and Chrysler are able to break the pattern. CEO's like Immelt come to view their jobs as schmoozing the government instead of running an enterprise with resulting mediocre to poor results.

  • Report this Comment On September 02, 2013, at 10:40 AM, mdk0611 wrote:

    Isn't the reduction in corporate taxes from stock option compensation offset by the increase in personal income taxes derive from the inclusion of that option income in the executive's 1040? In fact, given that fact that the top rates are the same but that the W-2 income is subject to the Medicare portion of FICA (which is matched by the employer) , doesn't this actually result in an INCREASE in tax revenue?

    Yes, I am aware of the rules Congress put into place limiting the deductibility of some compensation paid to the top 5 executives of publicly traded corporations. My question is how is that justified? And in particular, if the back up shortstop of the NY Mets makes more than the deductible limit, why is the figure set where it is and is not adjusted for inflation?

    BTW, speaking of corporate welfare, where is Solyndra in that list?

  • Report this Comment On September 02, 2013, at 10:22 PM, Seanickson wrote:

    It depends on whether the compensation would have happened under base pay otherwise. It is an odd set up though to have incentive compensation deductible but not regular pay over $1 million

  • Report this Comment On September 02, 2013, at 11:44 PM, CHill8008 wrote:

    The IPS is hardly a neutral source. And a "nearly 40%" failure rate is exactly the same as a "greater than 60%" success rate. I have in front of me THE MOTLEY FOOL STOCK ADVISOR news letter from May, my most recent issue. On the Recommendation Report Card there is the rather impressive proclamation "58% beating the market"... an impressive record to be sure, but a worse success rate than the greater than 60% found by the IPS among the top 25 CEO's over the last 20 years...

    But the people [shareholders] are happy with that, so the government is going to take action, an example of "the government dissolving the people and electing a new one" (and the greatest thing about using that quote is that in this context the originator is spinning in his grave;-)). The IPS report, and the Dodd-Frank regs it supports, is about as "market-based" as Barbie is anatomically-correct.

  • Report this Comment On September 03, 2013, at 9:01 AM, mdk0611 wrote:

    Sean - What's odd is that taxable compensation is not deductible only for CERTAIN people.

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