Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

Congress, meet unintended consequences

September 09, 2009

Section 162(m) became law in 1993. It capped business deductions for executive pay at $1 million, except for performance-based pay. The cap on deductions satisfied populist yearning to take high-flying executive down a peg. But the exception to the cap is a policy disaster. It encouraged the establishment of compensation packages that rewarded risk--exactly what we don't need if we wish to avoid another financial crisis.

The $1 million cap helped make stock options popular in comp packages, as option income wasn't covered. The joy of options is that the executives prosper if the stock goes up, but lose nothing if the stock crashes. When there's no downside, why not roll the dice?

But then Mr. Sullivan has a strange prescription -- some hair o' the dog:

Some members of Congress want to strengthen limits on the deductibility of pay across-the-board and get rid of the exceptions that encourage risky behavior. That's an idea that both conservatives and liberals should endorse.

I've got a better idea: forget about micromanaging corporate governance through the tax code. After viewing the damage caused by Congress, how can you recommend more Congress? I trust any random board of directors -- heck, any random crowd at McDonalds -- more than I trust Congress to come up with proper executive compensation packages.