Weekend Economists Celebrate September 13-15, 2013

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40. Companies Use IRS to Raise Bonuses With Earnings Goals

http://www.bloomberg.com/news/2013-09-13/six-cents-help-net-bonus-millions-as-ceos-get-lower-goals.html

After Exelon Corp. (EXC) earned less than top executives needed to reach their annual cash bonus target last year, the company's directors provided a way to help bridge the gap: nonexistent profits.

The board tacked on 6 cents a share -- equal to $85 million -- that the Chicago-based power company never made, augmenting earnings solely for the purpose of calculating bonuses. Exelon said that it would have earned the sum except for a regulatory setback on electricity rates and that the pennies helped thousands of employees avoid smaller payouts.

The 6 cents helped executives receive their fourth above-target bonus in five years as the company’s operating profits and its market value fell by more than half. Amid the slide, the board awarded more than $20 million in cash bonuses to top managers as tax-deductible “performance-based pay.”

Exelon and dozens of other corporations demonstrate how such tax-advantaged bonuses -- which cost the U.S Treasury $3.5 billion a year, according to the congressional Joint Committee on Taxation -- can reward even subpar shareholder returns. Chief executive officers at 63 companies in the Standard & Poor’s 500 Index (SPX) got cash incentive-pay increases last year after their share returns underperformed the index’s, according to data compiled by Bloomberg.