June 1, 2006
Taxing Executive Compensation
Congress passed a tax law in the 80s that capped a firm's deduction for executive compensation at $1 million. They all added an exception for performance based pay. Gretchen Morgenson's article in today's NYT is the result ("Big Bonuses Still Flo, Even if Bosses Miss Goals"). Companies has used the performance based pay exception very generously. First, companies set very low goals (if stock price drops only 10 percent an executive makes another $2 million). Second, companies use very loose definitions of performance (the many factor text) enabling a compensation committee to find some reason to grant a bonus. The bonuses become routine -- a part of the salary. And third, as in the case of Las Vegas Sands Corp., the committee awards bonuses without any pretense of considering the performance standards at all -- an extreme version of two.
Congress needs to revisit the tax statute and tighten it up the performance pay exception. The performance benchmarks that are acceptable need to be set ahead of time with a minimum of board discretion later. I would also be in favor of a tax surcharge on an executives that recieve salary in any form (options and stock grants included) that is not deductible to the granting company.
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"Congress needs to revisit the tax statute and tighten it up the performance pay exception."
Congress needs to pluck the beam from its own eye, and repeal the bloody law, which was a bit of demagogic mummery in the first place.
Roger Clemmens just signed a contract to pitch about 22 games for about $22 million. Where is your outrage.
Earned income is earned income no matter who earns it, or how it is earned, even when it is earned by middle aged, white, male, republican, suit and tie Johns working the day shift. Money that is stolen is deemed to be income, and it is not afforded special tax treatment. There is no rationale for the special tax treatment of executive compensation.
Posted by: Robert Schwartz | Jun 1, 2006 9:32:54 AM
Congressman Martin Sabo from Minnesota has proposed legislation that goes at the "performance pay exception" from a different -- and quite useful -- direction. His Income Equity Act would ban corporations from taking corporate income tax deductions on any executive compensation -- of any stripe -- that runs over 25 times the pay of a company's lowest-paid worker.
Big-time CEOs currently average over 400 times average worker pay. Peter Drucker, the founder of modern management science, believed the appropriate ratio between the top and bottom of the corporate ladder ought to be in the neighorhood of 20:1.
Posted by: Sam Pizzigati | Jun 3, 2006 6:15:04 PM