It is not secret that corporations love to pay their CEOs exorbitant salaries and hate to pay their lowest workers any higher than they have to, but there is a larger injustice that is occurring that these companies would love to keep in the shadows. The inconvenient truth of CEO pay is that much of it comes subsidized by the tax paying public.

If you don’t recognize the name “Yum! Brands,” you’ll definitely recognize the companies they own. Taco Bell, KFC, and Pizza Hut chains all fall under its corporate umbrella. Yum Brands employes nearly 400,000 US workers and their fast food chains are practically national symbols, recognized all over the world.

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Those companies are also extremely profitable. In 2012, Yum! Brands recorded a net income of $1.6 billion.

If you’re an investor of Yum! Brands you couldn’t be happier. If you were one of the 400,000 workers who make up the day-to-day operations at one of their locations, you probably didn’t share in its success. The wages for many of Yum! Brands employees was so low that many seek out, and are even encouraged by the company to seek out, anti-poverty programs like food stamps and affordable housing just to live. The actual wages are so disconnected with the living wage that the National Employment Law Project estimates that Yum Brands’ workers alone cost $650 million in medicaid and other public assistance annually.

Guess who pays for that $650 million? You do.

Guess who doesn’t pay for that $650 million? Yum! Brands.

But there is at least one person who works for Yum! Brands that gets a decent paycheck. CEO David Novak earned about $94 million dollars in 2011 and 2012. That money mostly came, not from a salary, but from so-called “performance pay” income like stock option gains, bonuses, and dividends. Not a bad paycheck considering the pay from one of his employees usually accounts to little more than minimum wage.

Performance pay is a good idea in theory. The idea behind it being that a CEO should have his or her income tied with the performance of his or her company as an incentive to always strive to better the company. That might make a CEO work harder but it does little to encourage him or her to share the companies success with anyone but the top rung of the corporate ladder. Most of the workers at the company don’t own any shares of the company they work for. If their company makes, say $1.6 billion in profits this year, they will receive exactly 0% of that profit. The shareholders and the CEO who have vast stock options reap all the benefits. And that imbalance shows.

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What’s more, the current tax code actually helps CEOs make more money. That’s because corporations are allowed to deduct unlimited amounts of a CEOs “performance pay” from their federal income taxes. So it is financially lucrative to pay their CEOs more because it lowers their overall tax burden. As Sarah Anderson, writing at billmoyers.com, points out:

Novak’s $94 million payout, for example, lowered YUM’s IRS bill by $33 million.

That’s $33 million in lost taxes for the federal government, which if you remember, is already paying $650 million to Yum! Brands’ workers so that they can record those profits that benefit Novak so well. This system is truly a closed circle of exploitation for the sake of enriching a very narrow band of the American people. So to pay Novak his $94 million and keep his stockholders happy the American taxpayers have to pick up a bill for roughly $683 million. And Yum! Brands is just one of many exercising this – perfectly legal – slight of hand.

Other major chains are fellow passengers on the greed train.

McDonald’s

McDonald’s CEO, James Skinner, got a cool $31 million by exercising stock options and other “performance pay.” Again, that is money that isn’t taxed, the government simply pretends it never happened, presumably shrugging their shoulders and saying “what can you do?”

New McDonald’s CEO Donald Thompson has kept pace. In just six months, he has already pulled in $10 million in performance pay.

Meanwhile, the distance between the CEO and the average worker is growing more and more:

The pay gap separating fast-food workers from their chief executive officers is growing at each of those companies. The disparity has doubled at McDonald’s Corp. in the last 10 years, according to data compiled by Bloomberg. At the same time, the company helped pay for lobbying against minimum-wage increases and sought to quash the kind of unionization efforts that erupted recently on the streets of Chicago and New York. [source]

That hostility towards higher wages and unionization is not unique to McDonald’s. Not surprisingly, all the major fast food corporations are members of the National Restaurant Association, which acts as a lobbying group that fights to prevent federal minimum wage from ever being raised. They are a major reason why it’s so hard to tie minimum wage with inflation. They’d rather see the wage kept artificially low so their profits get artificially high.

Subway

The home of the $5 foot long hardly pays its employees more than that. Low hourly wages and lack of benefits or steady hours, America has to subsidize Subway’s workers with $436 million in public assistance programs.

Burger King and Wendy’s

Rounding out the top five: Burger King and Wendy’s combined account for another $634 million in subsidies.

All told, America is allowing itself to pay $3.8 billion in tax money to employees of 10 of the country’s most profitable companies. This is clearly unsustainable. Aside from the ethics of not expecting companies to pay for the labor their workers do, the number of employees hired by – and therefore requiring subsidies for – these companies is the biggest growth industry in the country.

Screenshot_2The one job that many people can get is at fast food restaurant but a job there means not making enough to pay for anything, not even food or housing. Maybe that is why the economy is so sluggish. No one can pay for anything, not even the food they make at their job.

Here is David Callahan summing up the catch-22 nicely:

Yum! Brands’ low-wage business model doesn’t just impose big costs on tax payers, it also hurts businesses and the overall economy. Why? Because Yum! workers don’t have much extra spending money when they’re making poverty wages, and that makes them lousy consumers. Instead of Yum! Brands’ soaring profits filtering out into the broader economy through parallel rising wages — which is how capitalism is supposed to work, by the way — all that money is piling up in the hands of shareholders or is being used for stock buybacks or is being shovelled into David Novak’s bank account.

None of those destinations for Yum! profits is all that stimulative to the economy. For instance, there is only so much money that Novak can spend in consumption. The rest just gets stashed away and, yes, while Novak’s piggy bank is surely being invested somehow, that’s no big benefit either. There’s already plenty of capital sloshing around for investment. The big economic problem today is inadequate demand.

There are ways to fix this. One is the raise the minimum wage. That would tackle the bottom part of the problem. Fortunately, there are ways to tackle the top as well.

A bill introduced by Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) would simply set a firm $1 million cap for executive pay deductions — with no exceptions. Corporations could still pay their CEOs whatever they choose, but at least taxpayers wouldn’t be subsidizing anything above $1 million. The Joint Committee on Taxation estimates this legislation would generate more than $50 billion over 10 years. [source]

That’s $50 billion we could invest in schools, infrastructure, or paying down the deficit. CEOs might feel the squeeze a bit more, but it would enrich the lives of millions of workers and their families and bring the economy back in line.

 

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I let my curiosity take me for a walk. My job is to describe what I find under the rocks.