How taxpayers subsidize millions in restaurant CEO pay

It turns out a group of executives is getting a great deal on corporate pay -- while lobbying against providing their workers with a higher minimum wage.

Top execs at restaurant chains are benefiting from a tax loophole that allowed their businesses during the past two years to deduct over $200 million in "performance pay" from their corporate income taxes, a report from the left-leaning Institute for Policy Studies (IPS) found. At the same time, the restaurant industry's powerful National Restaurant Association (NRA) is actively lobbying against a proposed federal $10.10 minimum wage.

That helped the chief executives of the NRA's 20 largest members take home more than $662 million in fully deductible "performance pay" over the past two years, which reduced their corporate tax bills by $232 million, the study found. Meanwhile, many low-paid workers at restaurants run by NRA members -- such as McDonald's (MCD) and Chipotle (CMG) -- rely on government programs for services they can't afford on their earnings.

"Taxpayers are really subsidizing these huge pay packages," Sarah Anderson, Global Economy Project director at the Institute for Policy Studies, told CBS MoneyWatch. Given that the tax deductions affect only "a handful of individuals, that's when the figures are staggering."

Granted, the performance pay loophole benefits executives across all industries, but the IPS focused on the restaurant industry because of its vocal opposition to a higher minimum wage. The NRA claims raising the baseline wage will limit hiring at restaurants, which will also need to hike prices.

One of the biggest beneficiaries of the tax loophole is Starbucks (SBUX), whose chief executive Howard Schultz took home $236 million in exercised stock options and other "performance pay" from 2012-13, the study found. The upshot? An $82 million taxpayer subsidy for the company, which the study notes could pay for a $10.10 hourly rate for its 30,507 baristas for an entire year.

That may surprise some, given Schultz's image as a socially responsible manager. He's been quoted as saying he supports a higher minimum wage, although Starbucks' baristas earn an average of $8.79 an hour, below President Obama's proposed boost to $10.10.

So, how did this loophole come about? A tweak to the tax code in 1993, which aimed at reforming executive pay by capping corporate tax deductions for executive pay to $1 million, but which allowed tax deductions for "performance-based pay." Given that executive pay has skyrocketed in the years since, it's clear the tweak -- which was aimed at tamping down excessive pay -- failed.

The pay ratio between a chief executive and a minimum wage worker stood at 774-to-1 last year, according to the AFL-CIO.

At the same time, minimum-wage restaurant workers rely on public programs more than the general workforce, according to a 2013 study from the UC Berkeley Labor Center and the University of Illinois. More than half of front-line fast-food workers were enrolled in one or more public programs, more than double the rate of other workers. Fast-food workers and their families receive $1.04 billion in food-stamp benefits.

The National Restaurant Association said the organization has "not previously taken a position on the provision of the tax code that this report focuses on," and pointed out that 90 percent of its members are independent or franchisee-owned. "This report is a mischaracterization of an industry that has better management-to-staff ratios and fewer barriers to entry than virtually any other industry," the group said in a statement.

The current minimum wage of $7.25 an hour "is not a living wage anywhere in this country," Anderson said. "Minimum wage jobs aren't just high school and teenage jobs. Many people with families have to rely on them."

While some might argue that performance pay leads to better returns for investors, an increasing amount of research shows a disconnect between the two. A report from Bloomberg News last year found that CEOs at 63 companies in the S&P 500 stock index received incentive-pay raises even though their stock underperformed the index.

Other big beneficiaries of the tax loophole include Yum! Brands (YUM) CEO David Novak, who earned $67 million in performance pay over the 2012-2013 period, lowering the company's tax bill by $23 million, IPS found. It also says Chipotle has two CEOs, Steve Ells and Monty Moran, who racked up a tax deduction for their company of $69 million through the tax break.

  • Aimee Picchi

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