Top Executives Exercised About $25 to $30 Billion per Year in Equity Programs from 2001 to 2007

The top five executives of the 1,500 largest corporations in the U.S. averaged $25 to $30 billion per year in non-salary compensation between 2001 and 2007, according to a new report, Inclusive Capitalism for the American Workforce, by Richard B. Freeman of Harvard and Joseph R. Blasi and Douglas L. Kruse of Rutgers University. The report's estimates include actual profits from stock option exercises, not the values that are included on financial statements and annual reports, which are estimated long before the actual profits are known. The report's figures are based on Standard & Poor's ExecuComp data through the most recent year for which full data are available. During that same period, the share of national income going to labor either fell modestly or dropped fairly sharply, depending on whether one uses the Bureau of Labor Statistics or Bureau of Economic Analysis estimates of labor's share. The report is available at this link.

The authors argue that almost all of the equity awards involved are considered "performance-based" under Internal Revenue Code Section 162(m) and thus are exempt from the $1 million cap on compensation paid to certain executives that a public company can deduct from its income before taxes. This means that these deductions constitute a major public tax expenditure to support executive compensation. The report lays out a policy proposal that would maintain the deductions only for corporations that have broad-based equity and profit sharing programs that distribute at least as much to the bottom 80% of employees as those going to the top 5% of employees. Small businesses would be excluded. The entire policy discussion can be viewed at this link.

To put these data in perspective, the amounts going to the top five executives in these 1,500 companies (most of which is in equity) is about what is typically contributed to all ESOPs in a year and is about one-third of the total annual corporate contribution to all defined contribution plans.