Executive Compensation and Corporate Governance
27 Pages Posted: 14 Sep 2022
Date Written: August 25, 2022
Over the past four decades, Congress has repeatedly used tax policy to address executive-compensation practices, most notably through golden-parachute penalty taxes (enacted in 1984), a $1 million cap on compensation deductions (enacted in 1993 and expanded in 2017), and penalty taxes on nonqualified deferred compensation (enacted in 2004). The critical assumptions underlying these efforts are, first, that certain features of executive pay represent a failure of corporate governance and, second, that tax policy can correct that failure. The first assumption may or may not be correct; the theoretical and empirical arguments about it remain unresolved. But the second assumption is increasingly untenable. Penalty taxes have been largely ineffective in changing executive-compensation practices in the ways that legislators intend; in many instances, they actually exacerbate the features of executive pay that concern Congress in the first place. Most recently, the 2017 expansion of the $1 million deduction cap is a particularly misguided effort that likely will do little more than increase the economic burden of the corporate income tax borne by investors and rank-and-file workers.
Keywords: executive compensation, corporate governance, tax policy, golden parachute, $1 million cap, deferred compensation
JEL Classification: K22, K34
Suggested Citation: Suggested Citation