Show us the money
IN 1993, OUTRAGE OVER sky-high salaries for corporate chieftains led the Democratically controlled Congress to declare that, unlike other business expenses, salaries above $1 million couldn’t be deducted from corporate taxes. The move worked so poorly that the Senate’s newly restored Democratic majority is back for an encore.
The Clinton-era rules not only failed to stop executive pay from rising, they promoted a slew of accounting maneuvers -- such as stock options and supplemental retirement plans -- that made it even harder to discern exactly how much was being paid out. Now the Senate Finance Committee is attempting to crack down on one of those techniques.
As part of a bill to gradually raise the minimum wage from $5.15 to $7.25 an hour, the Finance Committee proposed an annual cap on the amount of surtax-free salary that employees could delay receiving until after they left a company. The cap would be $1 million, or the executive’s average pay for the previous five years, whichever is lower. Anyone who exceeded the cap would face a sizable penalty: They’d have to pay income taxes and a 20% surtax on the deferred money even before they received it.
Deferred compensation has become an extremely popular benefit, with more than 900 of the 1,000 largest corporations reportedly using it. It typically helps high-paid executives save more for their retirements than their company’s pension or 401(k) plans allow.
The issue here is not the gaudiness of executive salaries but whether the federal government should use the tax code to fight what is essentially a moralistic (and losing) battle. Publicly traded companies will pay what the market bears for top executive talent. Shareholders who object can always sell their stock. When the 1993 law capped the deductible portion of salary at $1 million, companies diverted compensation into still-deductible forms such as bonuses, stock options, deferred payments and other performance-related packages that were harder to quantify and prone to abuse. (The ongoing options backdating scandal is Exhibit A.)
There’s every reason to believe that the proposed cap on deferred compensation will lead to similar shenanigans, making it harder for shareholders and even corporate directors to tell what executives are being paid, let alone whether they’re earning their keep. Rather than giving corporate accountants a reason to muddy the waters again, lawmakers should undo the damage caused in 1993 by lifting the cap on deductions for executive pay. This year, new Securities and Exchange Commission rules will force firms to release easy-to-understand summaries of what executives are being paid. That kind transparency should be the goal, not the casualty, of federal tax policy.
