PI Original Ellyn Fortino Friday May 2nd, 2014, 1:22pm

Report Sheds Light On Taxpayer Subsidies For Restaurant CEO Pay

Some of the largest corporate members of the National Restaurant Association have pulled in hefty taxpayer subsidies for CEO pay at the same time the industry lobbying group has advocated against measures to increase the minimum wage for workers, a recent report from the Washington, D.C.-based Institute for Policy Studies shows. Progress Illinois takes a look at the report's findings.

Some of the largest corporate members of the National Restaurant Association (NRA) have pulled in hefty taxpayer subsidies for CEO pay at the same time the industry lobbying group has advocated against measures to increase the minimum wage for workers, a recent report from the Washington, D.C.-based Institute for Policy Studies (IPS) shows.

Taxpayers have been subsidizing CEO pay for the 20 biggest companies associated with the NRA — the largest membership-based foodservice trade association in the world — as well as other firms due to what critics say is a loophole that allows unlimited corporate tax write-offs on performance-based compensation for top executives.

From 2012 through 2013, CEOs of these 20 large companies — including Buffalo Wild Wings, Chipotle, Dunkin' Brands, McDonald's, Panera Bread, Ruby Tuesday, Starbucks and Yum! Brands (owner of Taco Bell, KFC and Pizza Hut), among others — hauled in a collective $662 million in fully deductible performance-based pay, which comes out to be a total tax break estimated at $232 million, according to the report. 

Darden, owner of Red Lobster, Olive Garden, LongHorn Steakhouse, Bahama Breeze and others, made the list for raking in the greatest taxpayer subsidy for its CEO pay out of all other full-service restaurant chain companies associated with the NRA. Darden CEO Clarence Otis earned nearly $9 million in performance pay in 2012 and 2013, which comes out to be a total tax break valued at $3 million, the report found.

The NRA, meanwhile, has been a fierce opponent of legislation that seeks to raise the federal minimum wage for workers from the current $7.25 an hour to $10.10 over a two-year period. It has also lobbied against state minimum wage hikes and opposes lifting the federal wage floor for tipped workers, which has been frozen at $2.13 an hour for more than two decades.

Emily Twarog, assistant professor at the University of Illinois at Urbana-Champaign’s School of Labor and Employment Relations, said the CEO performance-pay study "gets at the deeper discussion of the many tax breaks that companies are given, especially restaurants and the big box stores."

"I think that this is really important and an even more powerful way to look at ways in which companies are benefitting at the cost of most Americans, not just people who are working at the company," she said.

"It’s a problem that corporations are benefiting in this way and not compensating their on-the-ground employees, but it's also a problem of the American taxation system, [which] completely benefits the wealthy and really leaves the working poor in the dust in many ways," Twarog added.

Back in 1993, Congress limited the deductibility of certain executive pay to $1 million in response to various company practices, including big CEO severance, or "golden parachute," agreements. The law carved out an exception, however, for performance-based pay, such as stock options, non-equity incentive plans and stock appreciation rights, as part of Section 162(m) of the Internal Revenue Code. Currently, unlimited amounts can be deducted from corporations’ federal income taxes for costs associated with performance-based executive pay.

Due to the law, companies have shifted more executive compensation packages to meet the performance-based exception as a way to pay less federal taxes. This practice essentially leaves ordinary taxpayers on the hook for the lost tax revenue.

Jose Oliva, network director with the Restaurant Opportunities Centers United, a national organization dedicated to bettering the wages and working conditions for restaurant workers, called it "outrageous" that food service industry CEOs earned so much performance-based pay over the past two years.

"And then on top if it, the report points out that so much of this money is actually paid by us, by taxpayers," he said. "It's just incredible that we as a people are willing to complain about our property taxes and things like that and not complain about corporate welfare and how much money goes to major corporations."

But Charlotte Crane, a tax law expert at the Northwestern University School of Law, argued that there is "some certain irony to criticizing corporations for taking advantage of the fact that they can deduct their performance-based pay."

"The whole idea when 162(m) was enacted was to get them to stop paying not performance-based pay," she said. "The whole idea was to pay them only when they've earned it."

"You can question whether they deserve as much of the increased value that they're getting," she added. "You can say that (CEOs are) being overpaid, but at least the performance-based pay is more likely to reflect the value that this executive has added than not performance-based pay, in particular the pay that they might get when they're fired."

But Oliva argues that on-the-ground industry workers, not CEOs, are the ones adding value to the fast food and restaurant giants.

"If we as taxpayers are going to subsidize any of these companies, the subsidies should go directly to pay for frontline workers, the workers who are making the company profitable," he said. 

Not only are U.S. taxpayers subsidizing the performance pay of CEOs at fast food and major restaurant chains, they are also footing the bill for many frontline industry workers who are forced to seek public aid to supplement their low wages. Fifty-two percent of American fast food workers, for example, rely on some form of public aid, leaving taxpayers with an annual tab of nearly $7 billion, according to a October 2013 report by the University of California at Berkeley.

IPS researchers point out that the $232 million CEO-pay tax break is enough to cover average food-aid costs as part of the Supplemental Nutrition Assistance Program (SNAP) for more than 145,000 households for one year.

At the national level, fast food workers earn an average wage of $9.09 an hour, or an annual salary of less than $19,000 for a full-time employee, according to a separate report released last week by Demos, a progressive public policy organization. Most fast food workers, however, do not receive full-time hours, the report noted. While fast food workers are the lowest paid in the economy, according to the Demos report, the industry's CEOs are among America's highest earners. From 2000 to 2013, the average pay among fast food CEOs quadrupled to $23.8 million, while average fast-food workers' incomes grew just 0.3 percent over the same time period, Demos researchers found. 

Starbucks

Among the NRA's largest corporate members, Starbucks saw the biggest overall taxpayer subsidy for its CEO's performance-based pay over the past two years, the report found. The company paid its CEO Howard Schultz a whopping $236 million in total performance-based compensation during 2012 and 2013, reducing Starbucks' IRS bills by an estimated $82 million. That subsidy is enough to lift hourly wages to $10.10 for 30,507 Starbucks baristas or to $15 for 6,386 baristas for a year of full-time work, according to the IPS report.

Baristas at Starbucks — a business that made Fortune's list of 100 best companies to work for in 2013 as well as previous years — already make more than the federal hourly wage floor of $7.25. They earn around $8.79 an hour, which is also higher than Illinois' $8.25 minimum wage. Unlike many other major fast food corporations, Starbucks offers benefits, including health care coverage, to its full- and part-time employees who work at least 20 hours a week.

Starbucks CEO Shultz has stated that he supports a boost to the minimum wage, but he has also cautioned that there could be "unintended consequences" for such a move.

"We may not be able to afford to provide all the benefits if we had to go to $10 an hour," he told CNN in March.

Some see Starbucks as a leader in the industry when it comes to its labor practices, but Twarog does not think so.

"I think that they're leaders in advertising spin," she said, explaining that Starbucks tends to frame itself as a more progressive company. "We pay our workers a little more, folks have access to some benefits, so therefore (Starbucks) must be a better company than McDonald's. But the reality is that they still fight unionization campaigns. They don’t stay neutral if their workers try to organize into a union, but they're still taking advantage of these huge tax breaks. The bottom line is their corporation is making ... hundreds of millions of dollars a year while their workers are not getting 40 hours a week."

Chipotle

Following Starbucks, the biggest tax breaks over the past two years went to the fast food corporations Chipotle, Yum! Brands, McDonald’s and Dunkin’ Brands, which each hauled in subsides ranging from $12 million to $68 million for CEO performance pay.

Like Starbucks, Chipotle, is also known for paying its employees more than the minimum wage and offering health insurance to workers. Oliva acknowledged that Chipotle and Starbucks are on the better side of the spectrum when its comes to labor practices, but said they both still fall short when it comes to paying employees living wages.

"Most of the folks who work Chipotle or Starbucks jobs either have to patch together several jobs just to make ends meet or they are (working) part-time and they have a full-time job somewhere else," he said. 

Over the past two years, Chipotle's co-CEOs together earned almost $197 million in performance-based compensation, which translates into a tax break valued at nearly $69 million for the company, according to the report.

In January, Chipotle's Co-CEO Monty Moran said on a conference call with analysts that the average hourly wage among workers at the burrito chain is $9. As such, Moran said shifting to a minimum wage of $10 would have some impact on the company, “but not too significant," reported the Wall Street Journal's MarketWatch.

While Chipotle's average base wage is not up to the $15 level for which fast food industry workers with the national Fight for 15 campaign have been pushing, it is higher compared to other major fast food companies. For example, fast food crew members earn an average hourly wage of $7.76 at McDonald's, $7.70 at Wendy's and $7.63 at Burger King, according to Glassdoor.com.

Although Chipotle touts itself as a sustainable company delivering “food with integrity,” Twarog said both the Mexican grill chain and Starbucks are far from being "good moral" businesses.

"I think most of these large chains at this point, because of their association with the NRA, which is such a powerful lobbying group that’s lobbying not just against a living wage for workers but also the rights of workers to unionize and pushing right to work laws, that by affiliation with the NRA, you’re basically taking an anti-union stance," she said.

"Those companies that spin themselves as sustainable companies that aren’t sustainable in terms of their workforce are just sort of hypocritical," Twarog added. "I think it’s great that they exist and there are happy cows and happy pigs and all that stuff, but it needs to be a bit broader than that."

Chipotle was once almost entirely funded by McDonald's, but the Golden Arches fully disinvested in the company in 2006 in order to focus on its name brand.

Based on what Oliva has heard from long-time Chipotle workers, labor practices at the Mexican grill chain started to move in a more progressive direction after McDonald's disinvested in the company. 

When McDonald's was heavily invested in the company, Chipotle "didn't offer half the stuff that they offer now. They didn't have health care, for instance, and they definitely were not thinking about providing paid sick days."

"What was pretty obvious though was that the folks that they were hiring for Chipotle were vetted differently than the folks they were hiring for McDonald's, and they had a very strict policy of no transferring between the two companies," he said. "So they did treat them from the beginning as two separate entities." 

McDonald's

The IPS report showed that current McDonald's CEO Donald Thompson raked in $10 million in performance pay during his first six months as the fast food giant's top executive in 2012, which works out to be a $3.5 million tax subsidy for the company. Last year, however, Thompson earned a comparatively modest amount of performance-based pay of nearly $900,000, or a tax break for the company estimated at $346,000. Thompson's performance-based pay in 2013 was smaller than in 2012 because he "opted not to cash in any of his hundreds of thousands of exercisable 'in-the-money' stock options," the report reads. 

Irma Diaz, 35, a 14-year McDonald's employee, said she was troubled to hear that taxpayers have subsidized the fast food giant in a variety of ways at the same time its frontline workers are barely able to afford basic necessities.

Diaz, who currently works at the McDonald's near 95th Street and the Dan Ryan Expressway in Chicago, gets paid $8.45 an hour, does not receive full-time hours or benefits and has to work a second job selling Mary Kay and Avon cosmetics to help make ends meet.

Even with a second job, Diaz, a single mother with a 14 year-old son, still struggles to pay her bills. She said her low wages have forced her to tap public assistance, including food aid and Medicaid, so she can provide for her family. 

"(McDonald's officials) have to recognize that what they're doing, how they're paying us is wrong," Diaz said, speaking through a translator. "They should have enough dignity to pay us what we deserve, because thanks to our hard work, they're making millions and millions a year ... I would really like for them to have the dignity to pay us a living wage, so that we can survive and I could support my son."

Congressional (in)action

Democrats in Congress have introduced bills that look to close the performance pay loophole for top executives, but the idea has failed to gain traction among federal lawmakers.

Back in August, U.S. Sens. Jack Reed (D-RI) and Richard Blumenthal (D-CT) introduced the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, S. 1476. Under the proposed measure, publicly traded corporations would be allowed to deduct only up to $1 million in combined performance-based and salary pay per employee. The Joint Committee on Taxation projected that the legislation would bring in $50 billion in tax revenue over a 10-year period. State Rep. Lloyd Doggett (D-TX,35) introduced a companion bill in the House, HR 3970, in January.

Last year, U.S. Rep. Barbara Lee (D-CA,13) introduced another related measure, the Income Equity Act, H.R. 199. The bill would deny employers a tax deduction on compensation payments to any full-time employee that is greater than 25 times the pay of a firm’s lowest-paid worker or $500,000, whichever is larger.

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