Are corporate CEO’s paid too much?
Written by Benaiah on March 10th, 2008Liberals like Talleytowngal like to blame President Bush and Republicans for corporate welfare and high CEO salaries. I think it is time for a history lesson on the tax code concerning executive compensation of publicly held companies.
In the early 1990s, the investing community expressed mounting frustration over its belief that public companies were making excessive executive compensation payments without the approval or even knowledge of their shareholders. In response, in 1993 Congress enacted Internal Revenue Code section 162(m), which caps a public company’s corporate income tax deduction at $1 million per year for amounts paid to each of its top five executives. However, the provision included an important exception for performance-based pay plans, provided the plans are preapproved (sic) by the company’s shareholders and compensation committee.
Although many may have expected section 162(m)’s $1 million compensation limit to become a significant revenue raiser for the
government, the provision has rarely resulted in nondeductible compensation for the well-prepared company. That is because section 162(m) is very narrow in its denial of executive compensation deductions, for three principal reasons. First, the provision applies only to public companies. Second, the $1 million cap applies only to a company’s chief executive officer and each of the next four highest-paid executive officers (referred to as “covered employees”). Finally, and most important, the $1 million cap does not apply to performance-based pay (that is, bonuses).
So just who happened to be in charge in 1993? By limiting the deduction corporations can take on a CEO’s salary to just $1 million while creating performance based incentives, the Democratic controlled Congress created the massive disparity between CEO’s and the average worker we have today. From 30-40% in the early ’90’s to nearly 400% in some cases today. Now I am not arguing that the disparity is wrong. Publicly held corporations have to answer to their shareholders and they should decide their own compensation packages. I am pointing out that when Democrats try to punish corporations for perceived misdeeds they often get the opposite of what they intended in the first place. In this case instead of limiting CEO compensation they created a vehicle to help it explode.
In order to pay CEO’s a higher salary corporations began tying compensation to the company’s stock price in the form of stock options or bonuses. These stock options are the performance based exemptions set forth in section 162. When you tie compensation to stock prices executives begin making corporate decisions based on stock price because it affects their salaries. These decisions are not necessarily for the betterment of the company. Now this is a loose generality and should not be considered an indictment of any particular CEO nor should it be an indictment of every CEO. But take a look at some of the things that have happened since section 162 was enacted back in 1993. The .COM bubble burst in in 2000-2001, Enron and hundreds of other companies artificially inflated their stock prices creating massive fraud, many companies and their top executives got caught illegally back dating their options, and last executive turnover is reaching all time highs.
All of this contributes to the liberal perception of corporate greed, welfare, malfeasance, etc. When ironically it was Democrats who changed the law and caused this to happen.
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It was a well intentioned bill, when it was drafted. Unfortunately the Thieving, Lying CEO’s and Auditors, as well as their Legal teams. Found a way to skirt the nondeductible compensation clause. This is where the fall out of the Dot Coms, Enron’s etc. They over inflated the earnings, until they could no longer hide their malfeasance, and then dumped their stock. They knew all along what they were doing.
The Enron / Arthur Anderson scandal broke in Nov. 2001. After Bush & Co. took office.
The Republicans had already been in control of Congress for 7 years. Were they asleep all of this time?
Where the HELL has the Bush Administration been on this issue for the past 7 years? Let’s not forget that the Republicans took control of Congress in 1994! So… why has this bill not been repealed or at least amended in 13 years, 12 years which have been controlled by Republicans in both houses of congress?
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Lets solve this problem. Flat taxes with no deductions for businesses and individuals.
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Actually they have amended this bill. They attempted to fix the Democratic mistakes in 2003. The IRS began clamping down on 162 provisions in 2004 where before they generally ignored them. Actual repeal was next to impossible because the left would not allow us to go back to the old system of actual compensation. And the right believes in the free market. Pandora has already been let out of her box.
I just want to make sure I get this clear. According to your logic Enron was able to setup hundreds of shell corporations to hide their losses in a mere 8 months of the Bush Presidency. The scandal broke in Oct. not Nov. Lets not forget that in Sept the country was kind of busy. I know it is hard for you to believe but Enron started their illegal activities in the 90’s as did Global Crossing, Merck, KMart, Qwest comm, and others. Your obsession with blaming everything on President Bush is delusional.
If you start with a premise that it is all Bush’s fault you leave no room for healthy debate. I thought Obama was going to “CHANGE” all that. If so he needs to tell his supporters.
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I like it Ryan, but only the Fair Tax. Which means no taxes on any company. Tallytowngirl won’t like that. She wants to stick it to the evil lying corporate fat cats. What she does not realize it that companies simply pass on the increased taxes to their consumers and pay their workers less.
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What don’t you understand about the Republicans having control of both Houses of Congress from Nov. 1994 until Nov. 2006?
Which Party killed the Increase in Minimum Wage Bill… time and time again?
Who referred to the MEGA RICH AS HIS BASE?
Who nick named Ken Lay “Kenny Boy” and said he was one of his closest friends?
And Ryan, I agree with you, The Flat Tax is the only fair tax! Screw the Corporations… make them pay taxes on all of their profits as well as Wind Fall taxes!
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I think we can all agree our current taxation scheme is nothing more than an unworkable morass that undermines the economic vitality of this nation. This couple with excessive personal and corporate welfare schemes cause the American economy to underperform. I say impose a 15 percent personal income tax rate for everyone, a 15 percent corporate rate for all businesses, eliminate all forms of corporate/personal welfare, and move towards greater liberalization of trade policies.
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Tallygenius: What is a windfall profit? Could you define it for me?
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“I say impose a 15 percent personal income tax rate for everyone, a 15 percent corporate rate for all businesses”
Doesn’t it seem problematic to you to tax people at the poverty level, raising children, at the same rate as those raking in millions a year?
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Dave, how old are you. I thought you said that you had somewhat of an education? Do you take an economics class? You don’t know what Windfall profits are?
Hey Genius LOOK IT UP!
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Now Tally I have explained how Republicans have tried to fix the problem. But you are still not acknowledging that Democrats made the change originally that helped create the problem. So if I understand your logic you expect Republicans to clean up Democratic messes. Explain to me again why you vote democratic? Stop torturing yourself and switch sides. We would love to have you.
Corporations do not pay taxes. They only collect them for the government. If you increase taxes on a corporation they will role it into to the cost of the good or service and raise their prices on consumers like you and me. How is that a good thing?
I don’t think you know what windfall profits are. You definitely can not explain what a profit margin is. Windfall Profits is an emotional term not an economic one. It was created in 1980 by Democrats who wanted to punish oil companies because of the Arab oil embargo. Really it was a cash grab. Even then the tax did not meet projected estimates of revenue.
Liberals like to punish companies with taxes and fines, but in reality they hurt the consumer who pays higher prices, they hurt the worker who gets laid off because the cost of business goes up.
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Dave, did you hear that? You don’t have an education. LOL!
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I have a very insignificant education, but that is beside the point. Please define for me a “windfall profit”.
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Dave, OK a quick study on how Congress enacted THE CRUDE OIL WIND FALL TAX.
“In April 1980, the federal government enacted the crude oil windfall profit tax on the U.S. oil industry. The main purpose of the tax was to recoup for the federal government much of the revenue that would have otherwise gone to the oil industry as a result of the decontrol of oil prices. Supporters of the tax viewed this revenue as an unearned and unanticipated windfall caused by high oil prices, which were determined by the OPEC (Organization of Petroleum Exporting Countries) cartel. Despite its name, the windfall profit tax (WPT) was actually an excise tax, not a profits tax, imposed on the difference between the market price of oil and an adjusted base price.”
Seriously though… if you don’t know what a Windfall Profit / Windfall Tax is, then you need to take a refresher class in Business Economics.
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One more time….Define for me what a “windfall profit” is.
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Becky… I forgot to mention the imposition of what Milton Friedman called a negative income tax where essentially the government would eliminate programs per se and instead make a lump some payment to individuals to provide for themselves.
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Where’s Prof. Tally?
I still want to know what constitutes a windfall profit?