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The Million-Dollar Question: Has Congress Missed the Mark with I.R.C. § 162(m) Compensation Deduction Caps?

32 Pages Posted: 30 Apr 2012 Last revised: 25 Feb 2015

Cristopher D. Jones

Sutherland Asbill & Brennan LLP

Date Written: April 30, 2012


Public debate over executive pay in America is not new and is unlikely to dissipate any time soon. Though many Americans believe in limited government, we also value fair play and equal opportunity among competitors. Thus, executives’ pay garners special attention because we worry that some might take more than their fair share of the economic pie.

Between 1980 and 2010, chief executives went from earning forty-two times what blue-collar employees earned to 343 times median workers’ pay. In that same period, the median American household income increased only modestly, from $44,616 in 1980 to $49,445 in 2010. Theories abound as to why the gap between executive and worker pay has grown so dramatically and whether that growth is justified. But Americans of all stripes have called for Congress to address the disparities between executive and worker pay.

In 1993, Congress partly addressed this issue by enacting a tax provision, Internal Revenue Code § 162(m), that limits to $1 million the tax deductions that publicly-traded companies can get when they pay certain executives. This was not Congress’s first, or last, word on the subject. In fact, Congress enacted new restrictions in response to the more recent financial and healthcare crises. But § 162(m) has been Congress’s clearest effort to actually cap executive compensation using the Internal Revenue Code.

Sixteen years after its enactment, can we say that the $1 million deduction limitation works and that the Code is the best vehicle for Congress’s efforts to control executive pay? Drawing from a wide range of sources, this paper examines the § 162(m) limitation and explores whether the law achieves its intended result. To add context, it surveys other tax laws that restrict compensation deductions, like the § 280G tax deduction limits for “Golden Parachute” payments, the $500,000 deduction limit on compensation paid to executives at companies that received the largest Troubled Asset Relief Program (TARP) bailouts, and the Patient Protection and Affordable Care Act's (PPACA's) $500,000 deduction limit on compensation payments. It also examines the Dodd–Frank Wall Street Reform and Consumer Protection Act disclosure requirements and Congress's retreat from that regime in the Jumpstart Our Business Startups (JOBS) Act. Upon closer examination, it becomes clear that § 162(m) is less effective than letting shareholders have a binding say over how much companies pay their executives.

Keywords: executive compensation, § 162(m), TARP, PPACA, Dodd–Frank, JOBS Act, deduction limits

JEL Classification: H2, H20, H25, K34

Suggested Citation

Jones, Cristopher D., The Million-Dollar Question: Has Congress Missed the Mark with I.R.C. § 162(m) Compensation Deduction Caps? (April 30, 2012). Available at SSRN: or

Cristopher D. Jones (Contact Author)

Sutherland Asbill & Brennan LLP ( email )

700 6th Street NW
Suite 700
Washington, DC 20001
United States
202-383-0962 (Phone)


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