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WSJ ON UNINTENDED CONSEQUENCES OF COMP DEDUCTION CAP

December 27, 2006

The TaxProf links today to a Wall Street Journal piece ($link) on the tax-law origins of the stock option backdating scandals -- a topic we have discussed here.

First, it passed a law, pushed by President Clinton, seeking to rein in executive pay by limiting the tax break for it. The 1993 law said companies couldn't deduct yearly compensation of more than $1 million for any one of their top five officers. But it exempted certain kinds of pay linked to performance, which included stock options. Companies rushed to restructure pay plans to grant more options. In 1994, the first year the law was in effect, the value of option grants to CEOs at S&P 500 firms leapt by 45% on average, according to Mr. Murphy, and nearly doubled again over the next two years. The 1993 law "deserves pride of place in the Museum of Unintended Consequences," said Christopher Cox, chairman of the Securities and Exchange Commission, this fall.

The sensible thing would be to allow the consenting adults on public company boards to set their own pay levels and policies. Don't bet on Congress being sensible.

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