Money for Nothing and the Stocks for Free: Taxing Executive Compensation

49 Pages Posted: 4 Mar 2008 Last revised: 8 May 2008

Meredith R. Conway

Suffolk University Law School

Abstract

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 ยงยง 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.

Suggested Citation

Conway, Meredith R., Money for Nothing and the Stocks for Free: Taxing Executive Compensation. Cornell Journal of Law and Public Policy, Forthcoming; Suffolk University Law School Research Paper No. 08-11. Available at SSRN: https://ssrn.com/abstract=1101487

Meredith R. Conway (Contact Author)

Suffolk University Law School ( email )

120 Tremont Street
Boston, MA 02108-4977
United States

Paper statistics

Downloads
292
Rank
83,783
Abstract Views
1,874