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Bill Clinton's 1992 presidential campaign included a pledge to do something about what was then considered excessive compensation of corporate executives. Out of this came a congressional reining in the form of Section 162(m) of the Internal Revenue Code. This eliminated corporate tax deductions for any non-performance-based compensation above
$1 million annually for CEOs and the next three highest paid executives.
Problem: Performance-based compensation in the past 20 years has made a joke of that IRS provision. And last Friday Democratic Sens. Jack Reed of Rhode Island and Richard Blumenthal of Connecticut introduced legislation to do something about it.
Back in 2006, Sen. Charles Grassley, the Iowa Republican who was then-chair of the Senate Committee on Finance said:
"The 1993 law [...] was meant by its advocates to deny tax deductions when there was a great deviation between what executives got paid and what people further down the ladder got paid. It was well-intentioned. But it really hasn't worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss watch-like devices to game this Swiss cheese-like rule."
The problem is that corporations have gotten around the IRS provision in 162(m) by putting more and more top executive compensation into the performance-based category. Salaries and bonuses are covered by the $1 million cap. But as the Economic Policy Institute reported last year, non-equity incentive plans, stock options and stock appreciation rights are not. And that costs the federal Treasury billions.
Median pay for the top 200 CEOs in 2012 hit $15.1 million, a 16 percent increase over 2011. That, by the way, is 354 times what their average worker made. In 1992, when Clinton was campaigning to curb excessive executive pay, the ratio was 201:1. According to The New York Times, the median pay in 2012 for the top 200 CEOs was 60 percent in stock and options. And as the Institute for Policy Studies pointed out in Executive Excess 2011: The Massive CEO Rewards for Tax Dodging, a hunk of that money was reward for finding every way possible to reduce corporate taxes. No doubt including the performance-based pay arrangements. A win for the executive. A win for the corporation. A loss for taxpayers.
Reed and Blumenthal's bill—S. 1476, the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act—would close the 162(m) loophole and strictly limit corporate tax deductibility of executive compensation at all corporations that file periodic reports with the Security and Exchange Commission to $1 million. Period. And not just the CEOs and next top three executives, but all employees, current and former.
That doesn't mean corporations couldn't continue to overpay their executives if Reed-Blumenthal were to pass. But they would no longer be able to deduct the compensation from their corporate tax bill when doing so.
Estimated gain for the Treasury: $5 billion annually.