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WHITHER THE $1 MILLION COMP CAP?

September 08, 2006

Lawer-blogger Stuart Levine weighs in on this weeks hearings on possible changes to Section 162(m), the $1 million cap on executive pay deductions for public companies:

The hearings were directed toward the supposed cause and effect relationship between the $1 Million cap on executive compensation imposed by IRC Section 162(m) and the stock option backdating scandal. The argument in favor of the repeal of Section 162(m) goes like this: Section 162(m) imposes a penalty tax on executive compensation in excess of $1 Million a year, except compensation that is "performance-based." This has caused a growth in such performance-based compensation mechanisms as stock options which, in turn, have lead to such abuses as backdating of the options.

While I have some doubt as to the wisdom of Section 162(m), the option backdating scandal hardly provides a basis for repeal of the section any more than Bonnie and Clyde provided a justification for outlawing banks. (Although, I suppose that argument would have been a good excuse for a catchy slogan: "Unless banks are outlawed, only outlaws will have banks.")

I can only wish Mr. Levine were right in thinking that there is any intention of repealing 162(m), which is a clumsy and ineffectual attempt by Congress to tell the nation's public company compensation committees how to do their jobs. Alas... I see nothing that indicates Congress would do anything so sensible. Far more likely that they will add some new parts to a law that already doesn't work well.

Mr. Levine's analogy on repealing 162(m) in the wake of the option backdating scandals is interesting - like outlawing banks in response to Bonnie and Clyde. A better analogy is to repealing prohibition in response to Al Capone. That actually worked out all right.

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