Friday, May 9, 2008

Increasing Taxes on CEOs -- Who will it Hurt?

Saw this little bit on Townhall:

(I don't remember exactly where I heard or read the following supposition, but it is not original to me. It's also a very, very simplified look at corporate boards, but it is usefull, nonetheless).

But, lets look at how CEO salaries get set. Many corporate boards are comprised of CEOs (and other corporate bigwigs) of other companies. The Boards typically set the CEOs salaries. And, finally, the whole CEO/Board relationship tends to be a bit incestuous, corporately speaking, that is.

Imagine five companies named A, B, C, D & E. It doesn't matter what industry these companies are in. Now each company has a CEO coincidently named CEO-A, ... CEO-E.

For simplicity's sake, let's say each company has three members on its Board. So Company A's Board consists of CEO-B, CEO-C & CEO-D. Company B's Board consists of CEO-C, CEO-D & CEO-E, and so on. S Company E's Board consists of CEO-A, CEO-B & CEO-C. Thus, each CEO sits on three other Companies' Boards.

Now, when it's compensation time, Company A's board meets and agrees that CEO-A is doing at least an average to better-than-average job, so his new compensation should be about or slightly more than his peers. So round-and-round it goes and each CEO gets their "reasonable" compensation.

Let's throw in the new Obama Tax. Company A's Board (who's members are also CEOs and know that the tax will hit them also) meets and decides that CEO-A's compensation needs to be increased to pay for the additional Obama Tax. The other four companies' boards (comprised of the same CEOs) do the same for their respective CEOs.

One of the major complaints against CEO's is that the make many multiples of the "lower" earners in their companies. But, the Obama Tax will actually increase this multiple! You can bet that the average worker will not get the same percentage compensation increase as the CEO -- after all they're not affected by the Obama Tax, so why would they? What are the other consequences of the increased CEO Salary to offset the Obama Tax? The company will either have to cut costs (i.e. people) or increase the cost of their product or service.

Does Obama think through his positions or does he just throw 'em out there like a rider on a Mardi Gras float? (Sorry, being from New Orleans, I have to use analogies that are cogent to me).

Now let's throw in some numbers to make it more real. Let's say that CEO-A's before tax compensation is an even mil. And Joe Worker at Company A makes $50 grand. That means that the CEO makes twenty (20) times what Joe makes. Now we'll put the CEO's tax burden at 25% (given all of those darned rich-people loopholes) and Joe's tax burden at 15%. So their respective take home pays are $75o,000 and $42,500. Company A's Board wants to make sure that the CEO's take home remains the same with the new Obama Tax rate of, say 35%. So the CEO's pre-tax pay becomes $1,154,000. Now, lets give both the CEO and the employee a 5% COLA raise. New before tax salaries are $1,212,000 and $52,500, respectively. But look at the ratio -- instead of being 20 times, its 23 times. Won't this increase the resentment of the common folk even more?

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