Retailer's Executive Pay Plan Exploits Tax Break, Study Says

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A report by two Washington groups takes Wal-Mart Stores Inc. to task for exploiting performance-based pay breaks in Internal Revenue Code Section 162(m) to subsidize excessive executive compensation at taxpayer expense.  

The retailer, which is the largest private employer in the U.S., saved about $104 million over the past six years by deducting performance-based compensation paid to eight top executives, said the June 4 report, by a think tank, Institute for Policy Studies, and a national tax advocacy group, Americans for Tax Fairness.

The executives received more than $298 million in performance-based pay that was fully tax deductible, the report said. Section 162(m) of the federal tax code limits the compensation deduction at public companies to $1 million; performance-based pay, including stock options, is excluded from the deduction limit. The effect of the Section 162(m) tax break is that “the larger the executive payouts the less Wal-Mart pays in taxes,” it said.

Michael T. Duke, Wal-Mart's recently retired president and chief executive officer earned about $116 million in exercised stock options and other compensation from 2009 to 2014, the report said. Duke now is chairman of the executive committee of the board of directors.

“That translates into a taxpayer subsidy for Wal-Mart of more than $40 million,” the report said.

Wal-Mart reported net income of $16 billion and revenue of $476 billion for the 12-month fiscal year ended Jan. 31, 2014, according to documents filed with the Securities and Exchange Commission.

Wal-Mart spokesman Randy Hargrove disagreed with the report's findings. “Wal-Mart is a pay-for-performance company,” he said. “Our executive compensation program has been developed in the same way as other companies across America, and it complies with the federal tax laws.”

Stock-Option Criticism

Stock options have been criticized for encouraging reckless behavior by executives to increase share prices in the short-term, even at the expense of the company's long-term health, the report said. In response, many companies have shifted some executive compensation from stock options to grants of stock conditioned on meeting specific performance metrics, it said.

A 2013 Bloomberg investigation revealed that this form of pay also may be easily manipulated to reward poor performers, the Washington groups said in their report. According to the Bloomberg report, “Companies Use IRS to Raise Bonuses With Earnings Goals,” CEOs at 63 companies in the Standard & Poor's 500 index received performance-pay increases in 2012 although their share returns underperformed their index peers.

Overall, chief executive officers' compensation rose modestly in 2013 and pay appears to be closely linked to performance, according to a survey of proxy filings by Hay Group for the Wall Street Journal that found moderate growth in executive pay for the third consecutive year. The median increase in pay for CEOs was 5.5 percent, to reach a median $11.4 million, the survey said. Annual incentives increased 4 percent to $2.3 million, yielding an overall increase of 3.7 percent in median cash compensation to $3.6 million, it said.

Pay packages were closely tied to a company's performance or to the fate of its stock, the survey said.

To contact the reporter on this story: Michael Trimarchi in Washington at mtrimarchi@bna.com

To contact the editor responsible for this story: Michael Baer at mbaer@bna.com