Tax Rate Transparency Tool: Behind the Numbers

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Tax Rate Tool: Definitions & Common Questions

Sources

All data for this tool was pulled from official company documents filed with the Securities & Exchange Commission (SEC) for the most recent fiscal year (2011).

Definitions

Actual Tax Rate Paid = Current portion of Federal Taxes / Pre-tax Income

Income = Pre-tax Income

Tax Rate Reported = Effective Tax Rate = Provision for Income Taxes / Pre-tax Income

Highest Paid Employee Total Compensation = All salary, bonus, stock, option, pension, and other compensation given to the highest paid employee.  Stock and options are valued at the expense recognized by the company (the market value at issuance).  This number was taken directly from the “total” column of the Summary Compensation Table of the Proxy Document.

Highest Paid Employee Name & Position = The executive listed in the Summary Compensation Table of the Proxy document with the highest compensation

Average Employee Pay Total Compensation = Best estimate of personnel expenses / Total Employees

Best estimate of personnel expenses = Personnel expenses when available (not typical), otherwise Sales, General, and Administrative expenses and/or Research & Development Expenses.  Different industries have dramatically different expense classifications so NerdWallet read each 10-K financial statement and made a subjective determination of what should be included on a case-by-case basis.

Multiple of Highest Pay to Average Pay = Highest Paid Employee Total Compensation / Average Employee Pay Total Compensation

 

Common Questions

Why did you only include the Current portion of Federal taxes when calculating Actual Tax Rate Paid?

Since many American companies run a large portion of their business overseas, sometimes for business purposes and sometimes to minimize taxes, we thought it would be valuable to be able to see just how much of their total income these American companies actually paid in taxes to the U.S. Federal government.  Because we wanted to look at what they actually paid, not what they allocated or deferred, we only looked at the current portion of federal taxes.  We are in no way suggesting that when a company has a very low “Actual Tax Rate Paid” that they did not pay what they owe.  We are simply drawing attention to the fact that many American companies earning billions of dollars per year only pay a small percentage of that income to the U.S. federal government.

Why is average employee pay so high (or so low)?

Companies are not required to directly disclose personnel expenses.  NerdWallet examined 500 financial documents on a case by case basis and did our best to include all categories that contained personnel costs.  Unfortunately, these categories also contain some other costs.  As a result, compensation will often be overstated.  For example, if a company had $20 million of salary expenses for research and development scientists and spent $50 million on research and development equipment, the company would only report $70 million as a research and development expense without disclosing how much was paid to employees.  Marketing is another category, like research and development, where it is impossible to tell how much went to personnel and how much went to advertising expenses.  Thus, for companies that spend heavily on research and development or advertising, it is likely that the compensation will be overstated. We did our best to minimize this, but unfortunately there is not enough data to be more precise.

Another case where average worker pay is likely to be overstated is when the company has very few employees and a few highly paid executives.  For example, a 100 person company with an executive earning $20 million and 99 employees each earning $100,000 would report an average compensation per employee of $299,000, even though 99% of the employees only earn 1/3 that much.

On the other extreme, some companies have very low average employee pay.  This is common in companies with lots of part-time or commissioned employees.  For example, if someone works in retail for only 10 hours per week at $10 per hour, their annual income would be approximately $5,000.  Alternatively, a company may employ workers on a contract or commission basis and may have many people on their payroll as “employees” who really do not do much work for the company or who work for many companies.  For example, an insurance broker working for many companies on a commission basis and only earning $500 per year from each one  would be counted on each of the employers’ financial statements as an employee with an annual income of $500.

What is a “Tax-Free REIT”?

A REIT is an acronym for Real Estate Investment Trust.  This means that the company is set up for the purpose of investing in physical properties and as long as it distributes 100% of its income to its shareholders each year (a dividend), the company does not owe federal income taxes.  Of course the owners who receive these annual payouts must pay income taxes on the money.

Who determines executive compensation?

Compensation for the top company executives is determined by the Board of Trustees that governs the company.  The Board is meant to oversee the CEO and other executives, but not get involved in day to day operating decisions.  The Board has the ability to fire a CEO if they don’t care for the way he is running the company.  Members of the Board are typically industry experts and executive level business leaders who are well positioned to advise the company.  Board Members are elected by shareholders.  If you own a share of stock in a company, you have a vote as to who will oversee it (unless it is a non-voting share, which is less common).