This Bloomberg News article about companies reincorporating abroad to avoid taxes provides some good perspective on Jamie Dimon's pay. The short story is that U.S. companies can, with a certain amount of effort, move their legal address to Ireland or wherever and more or less avoid paying any taxes. This is called an "inversion," and the math is pretty straightforward:
- Take money from the U.S. government.
- Give it to shareholders.
So if you can do it you ... do it? I guess? I mean, not everyone does it, and there are public relations and so forth reasons not to,1
but roughly speaking if you are a corporate director you value a dollar in the hands of your shareholders significantly higher than you value a dollar in the hands of the government. This is pretty basic stuff.
Similarly straightforwardly, the U.S. government values a dollar in its own hands more than a dollar in the hands of shareholders of foreign-incorporate companies, though this is perhaps a more complex calculation. So in 2004 Congress passed a law to express its displeasure.
The law imposes a special tax of 15 percent on restricted stock and options held by the most senior executives when a company reincorporates outside the U.S.
Can you guess what happened? Oh sure you can, you are smart, and it is easy:
Since the measure took effect, at least seven large companies have disclosed in securities filings that they risked triggering the tax. All took steps to shield their executives from having to pay.
Three of the companies’ boards simply picked up the tax bill for their executives, maintaining that the managers shouldn’t suffer for a decision that benefits shareholders.
At three other companies, including Actavis, the boards went a step further, helping them avoid the tax altogether by allowing restricted stock to vest early and for options to be exercised. Awarding the equity early raises the risk that the executives might quit or sell their shares, or get paid for meeting goals they never attain.
So fine, this joins the long list of stories of "law intended to reduce executive compensation does opposite."2
But that theory is interesting: "the managers shouldn't suffer for a decision that benefits shareholders."3 Congress literally decided that the managers should suffer for a decision that benefits shareholders. Like, they passed a law that said, "here is how we will cause suffering to the managers who make that decision to benefit their shareholders." The suffering was, of course, in the form of taking away money, both because that is how the tax law imposes suffering, and because that is how corporate managers experience suffering.
And the managers -- oh, their boards, whatever -- were like, hahahahaha nope. The transaction is now:
- Company takes $100 from the U.S. government.
- Government takes $10 from executives.
- Company gives $10 to executives, $90 to shareholders.
Or whatever, the numbers aren't important.4 What's important is that they are just numbers. An alternative way of thinking would be:
- Government says "we do not want you to do this thing even if it's good for shareholders." Government, being government, expresses this disapproval through a tax law. (Though also through words: “These expatriations aren’t illegal. But they’re sure immoral,” Charles Grassley said about one of them.)
- Company says, "hmm, okay, sorry shareholders, but we are doing our patriotic duty and abiding by the will of Congress."
- Executives keep their money, government keeps its money, and shareholders miss out on some extra money, but feel a warm sense of patriotic pride, if they're American, which some of them are.
I feel silly typing that but it is not, like, an utterly implausible way to understand the world. In this approach, there's no weighing of commensurable economic quantities, the tax savings from inversion versus cost of executive pay gross-ups. There's just, this is not the right thing to do, Congress said so, so we won't.5
One CEO who knows from public disapproval is Jamie Dimon. Is he good for shareholders? That is a hard question and one that a lot of people have a lot of incentive to make harder. Certainly a lot of smart people think the answer is yes. More to the point, presumably all the people on JPMorgan's board think that the answer is yes, and reasonably so.
Did Jamie Dimon preside over doings that led to gajillions of dollars of fines and a widespread sentiment among the public and politicians that JPMorgan has, you know, let down the side, social-contract-wise? Sure, yes, we can confidently say yes to that. People don't like a lot of what JPMorgan has been doing, and that dislike has been expressed in tens of billions of dollars of fines and penalties.
The question is how we should weigh those two things: If you make money, even after paying the fines, should you be rewarded for being Good For Shareholders? Or are the fines not commensurable with the profits? Should presiding over socially undesirable things that lead your firm to be punished with tens of billions of dollars of fines mean that you should be punished too?
You can answer that question in your heart however you want, but the most immediately relevant answers are those that come from JPMorgan's directors. Who are U.S. corporate directors. Who think things like "the managers shouldn't suffer for a decision that benefits shareholders." One gets the sense that that means "the managers shouldn't be punished for any decision that benefits shareholders."
If that's how you think, the analysis is easy. Well, I mean, it's very hard -- the question of how much a CEO is benefiting shareholders is not an easy one -- but it proceeds on one dimension. Count up the money you've made (hard!6 ), subtract the money you've paid (easier!7 ), and then give Dimon his fair share of the difference. That's how it works for tax inversions, apparently, and the logic extends easily to mortgage-backed-security fraud and London Whaling and everything else. Shareholder value is all that matters; the rest is just noise.
For instance, Stanley Works was deterred from Bermuda-izing itself by legal and union pressures. Seems to be popular among pharmaceutical companies, which don't have especially intensive consumer- or labor-facing public relations needs.
2 Most classically, the non-deductibility of executive salaries over $1 million "may have established one million dollars as the base salary for CEOs." Conceptually, the way these laws always seem to work is that they seek to mobilize shareholders against executive compensation, by disclosing excessive-looking pay to shareholders, say, or by making shareholders pay taxes on that compensation. This might work if executive pay were set by shareholders, though you could argue otherwise. In any case, though, executive pay is set by boards, meaning more or less other directors, and then paid by shareholders. The agency costs are sort of invariant under more taxes.
3 That's Bloomberg News's expression but it tracks what the companies say. E.g. Actavis:
The Actavis board of directors carefully considered the potential impact of the imposition of the Section 4985 excise tax on Actavis’ Section 16 reporting officers and directors, determining that the imposition of the tax would result in the affected individuals being deprived of a substantial portion of the value of their then-unvested equity awards. The Actavis board of directors further concluded that it would not be appropriate to permit a significant burden arising from a transaction that was in the interests of stockholders to be imposed on the individuals most responsible for consummating the transaction and ensuring the success of the combined companies.
Again, Congress concluded that it would be appropriate to impose a significant burden on the individuals most responsible for consummating the transaction. That was the whole point of the law! But, nope.
4 Actavis, one of the companies named in the article, apparently got a tax benefit of $4 a share from the reincorporation. Even leaving aside the non-tax benefits of the transaction, $4 times 127.7 million pre-transaction shares is over $500 million of tax savings to shareholders. Actavis accelerated about $100 million of stock awards ($40 million to the CEO), which is not a $100 million "cost," and paid the CEO a $5 million extra retention bonus. Seems like a good deal for everyone. Except Treasury obvs.
5 Of course if you don't view Congress as a top-class arbiter of the right thing to do, you will tend toward the commensurable cost-benefit approach. One suspects that's how corporate boards work.
6 Because of seat-value, value-over-replacement-banker, etc. effects.
7 Though to be rigorous here you should be counting only Jamie Dimon's contribution to increasing the fines that JPMorgan paid. Presumably it'd have paid a lot of fines whoever was CEO. Maybe more than it paid under Dimon! So, this is hard too I guess.
To contact the writer of this article: Matt Levine at firstname.lastname@example.org.
To contact the editor responsible for this article: Tobin Harshaw at email@example.com.