Delaware has been a favorite refuge for grasping corporate execs ever since the early 20th century, and over two-thirds of the Fortune 500 currently make corporate-friendly Delaware their legal home. Delaware’s tax and privacy laws, applauds Forbes, have left the state “internationally recognized as a corporate paradise.”
What’s made Delaware so popular with the executive-suite set? Among the many goodies the state offers: Firms that choose to incorporate in Delaware can operate elsewhere and still avoid paying the state’s corporate income tax.
The Court of Chancery’s Kathaleen McCormick has now upset Delaware’s charming corporate apple cart and delivered Musk’s empire a stinging and costly rebuke. In a 201-page ruling, McCormick has labeled the process that led up to the Musk 2018 Tesla pay deal “deeply flawed” and totally voided the contract that handed Musk “the largest potential compensation plan in the history of public markets.”
The Tesla defense for this over $55 billion deal claimed that all those billions served to give Musk the motivation he needed to lead Tesla to glory. Judge McCormick essentially called that defense nonsense. Musk, she pointed out, already held Tesla shares worth tens of billions before the 2018 pay deal. What more motivation could he possibly need?
“Elon Musk’s compensation came to 89 percent of Tesla’s gross (pre-tax) profits over the years 2019-2023,” observes economist Dean Baker. “It seems unlikely that that the company could not have attracted a competent CEO who would have agreed to work for a sum substantially less than 90 percent of the company’s profits.”
Musk and his Tesla legal team can still appeal McCormick’s ruling, but the Delaware Supreme Court, notes activist economist and former U.S. secretary of labor Robert Reich, “has historically given chancellors like McCormick wide latitude.”
So has the Delaware Court of Chancery now put the kibosh on outrageous excessive executive pay? McCormick’s “incredibly important decision,” points out Institute for Policy Studies analyst Sarah Anderson, certainly does establish the existence of excessive compensation. And that decision, adds Cornell University’s Brian Dunn, will most likely help “reign in” the “extremes” we now see in U.S.-style executive pay.
But the new Delaware ruling, Dunn notes, won’t likely “lower CEO pay overall.” Realizing that broader lowering will require much more than what one open-minded Delaware judge can deliver.
How can we get that much more going? We can, for starters, begin denying tax dollars and tax breaks to firms that pay their CEOs outrageously more than what they pay their workers. Lawmakers in Congress now have on their legislative plate a growing selection of measures that, if enacted, would do just that.
The latest of these measures now pending — the Tax Excessive CEO Pay Act — would link the federal corporate income tax rate to each corporation’s CEO-worker compensation gap. Firms that pay their top execs over 50 times what they pay their typical workers would pay taxes at a higher rate, some 0.5 percentage points higher if those execs make under 100 times their median worker pay and 5 points higher if they pay their CEOs over 500 times their typical worker compensation.
“The American people understand,” notes Senator Bernie Sanders, a lead Senate sponsor of the legislation, “that today we are moving toward an oligarchic form of society where the very rich are doing phenomenally well, while working families continue to struggle to put a roof over their heads, feed their families, and pay for the basic necessities of life.”
“Millionaire and billionaire CEOs at massive corporations are cashing in larger and larger paychecks even as their workers — who make those profits possible — barely see their pay keep pace with rising costs,” agrees Senator Chris Van Hollen of Maryland, another Senate sponsor. “These obscene gaps are grossly unfair to workers and harmful to our economy as a whole.”
“It’s disgraceful that corporations continue to rake in record profits by exploiting the labor of their workers,” adds Rep. Rashida Tlaib from Michigan, one of the legislation’s sponsors on the House side. “Working families deserve to live with human dignity.”
How much of a dollar difference could this legislation’s passage make? If the Tax Excessive CEO Pay Act had been law in 2022, JPMorgan Chase would have paid up to $1.04 billion more in taxes. Google, for its part, would have faced a tax bill up to over $3.07 billion higher.
This content originally appeared on CounterPunch.org and was authored by Sam Pizzigati.
Sam Pizzigati | Radio Free (2024-02-14T06:57:18+00:00) New Hope for a Check on CEO Compensation. Retrieved from https://www.radiofree.org/2024/02/14/new-hope-for-a-check-on-ceo-compensation/
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