Bear Left!

The Chief Executive Tax
Tim Francis-Wright

Several years ago, Spy magazine published an article on the relationship between consumer spending an celebrity endorsements. Rather than dispassionately analyzing the correlations between endorsements payments, profits, and sales, the article simply called these payments what they were: a hidden tax on consumers. For example, it dubbed the Candice Bergen tax to be the amount paid by the Sprint customers out of each dollar on their long- distance bills to cover Bergen's fees for Sprint's ubiquitous television commercials.

Today, customers of American companies face a much more invidious tax. That tax is the Chief Executive Tax, the amount paid out of sales to line the pockets of the heads of America's largest companies. The invisible hands of the market seldom work as advertised, but they really do affect celebrity endorsements. If one celebrity asks for too much compensation, others are ready and willing to step into the breach. However, the Chief Executive Tax is resilient, even in the face of falling corporate profits.

Not long ago, the Starbucks corporation put an ad in the Boston subway proclaiming the virtues of one of its new drinks "because you don't own beachfront property." An enterprising anarchist had scrawled on the ad "but the CEO of Starbucks does." While we may never know the full property holdings of the CEOs of American companies, we do get to find out how much money they make each year.

The New York Times complies every year a table of executive compensation for 200 large corporations. In 2001, the median of the overall compensation for the 200 chief executives was a whopping $9,065,417. Although the median company in the chart had a decline in net income of 33 percent from 2000 to 2001, the median chief executive earned a healthy 7 percent raise.

Most of the income earned by these chief executives came in the forms of stock options. In theory, issuing stock options to executives makes them more like the owners of a business and less like mere managers of a business. In theory, they will act in the best interests of the workers and stockholders if they have real stakes in the company. In practice, huge grants of stock options reward corporate executives for short-term gains in a company's stock.

In the table, I have assembled, from the data provided by the Times and by Fortune magazine, the 2001 compensation for 32 companies, of which 30 are Fortune 500 companies. Many of these companies have egregiously high compensation to their executives, although a few pay their executives relatively small or even reasonable amounts. With a few exceptions, these companies sell a large amount of their products or services directly to consumers, so their Executive Tax are in fact hidden retail taxes.

*Not in the Fortune 500. Starbucks is #550. Tyco is not in the Fortune 500 because its headquarters are in Bermuda: it would be #41 if it were based in the United States.

Eight of these companies have Chief Executive Taxes in excess of 0.3% of gross 2001 sales. At Capital One, over 1.37% of revenue from interest and fees from credit cards went to compansate its chief executive. The next highest tax rates were at Cisco Systems, MBNA, Gillette, Starbucks, Hershey Foods, AOL Time Warner, and Sprint. These number do not show whether Orin Smith of Starbucks bought any beachfront property, but they do show that he could afford it: for every $3 latte Starbucks sold, he got over a penny in compensation. Plus, with an Executive Tax of 0.316%, Sprint paid over $82 million to its chief executive in 2001. Candice Bergen was, by comparison a bargain.

A tax of 0.3% of so does not seem like very much, but imagine the consequences if the chief executives of these companies had to post on their products their shares of the retail prices. A $2.99 bag of Hershey's Kisses would say "$0.01 goes directly to Richard Lenny." A $25 late fee on an MBNA credit card account would say "$0.15 goes directly to Alfred Lerner." Experience has shown that American taxpayers generally decline to allocate $3 of their taxes to the Presidential Election Campaign Fund. It is a pity that they do not have the same choice in their everyday spending habits.