Money for Nothing and the Stocks for Free: Taxing Executive Compensation
49 Pages Posted: 4 Mar 2008 Last revised: 8 May 2008
In the 1980s and 1990s, the public began to protest the large compensation packages executives were receiving. Average workers were struggling while executives got raises, even as the corporations they worked for failed. This disconnect between executive compensation and executive performance led Congress to attempt to curtail executive compensation. This article will examine the Congress's attempt to temper the amount of compensation through the tax code. These tax code provisions enacted by Congress to restrain excessive executive compensation in fact had the effect of increasing compensation for certain executives at a great cost to stockholders. In 1980, the average CEO made 42 times the average hourly worker's pay. By 1990, the average CEO made 107 times the average hourly worker's pay. In 1993, Congress enacted tax legislation intended to rein in excessive executive compensation. However, in 2000, the average CEO made 525 times the average hourly worker's pay. Compensation amounts that executives receive since the enactment of the tax provisions are increasing dramatically, not decreasing.
Congress believed that linking performance and compensation would adequately address excessive compensation amounts. Stock prices are one indicator of how a corporation is performing, and Congress accordingly enacted tax provisions linking executive compensation to stock performance. The tax provisions sought to convert cash compensation to stock options because it was thought that doing so would align the interests of executives and shareholders by making executives vested owners in the corporation as well. The unintended result was to encourage corporate fraud and accounting misrepresentations intended to inflate earnings and bring executives higher salaries.
The three most important tax code provisions designed to contain or regulate excessive compensation are §§ 162, 162(m) and 280G. None of these sections work as they were intended. On the contrary, they have resulted in even larger amounts of compensation amounts paid to executives at greater cost to shareholders. This article will seek to demonstrate that the effects of these tax code provisions are in direct conflict with their intended purpose.
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