With executive compensation at record highs, two senators are trying to end a government subsidy of performance-driven executive pay schemes that cost taxpayers $5 billion per year. Sens. Jack Reed (D-RI) and Richard Blumenthal (D-CT) proposed a bill Friday that would limit the amount of performance-based pay that can be written off as a tax deduction and bring in $50 billion in tax revenue over a decade.
The public subsidy of CEO pay began in 1993, when Congress exempted performance-based compensation from a law limiting the tax deductibility of executive pay. The resulting shift towards stock options and other non-cash compensation that meets the government’s definition of “performance-based” pay has cost the government tens of billions of dollars. According to a 2012 Economic Policy Institute study, the lost revenue totals $7.5 billion each year.
The senators’ press release announcing the bill said the Joint Committee on Taxation has scored their legislation, the Stop Subsidizing Multimillion Corporate Bonuses Act, as netting about two-thirds of that EPI figure. The bill would also get rid of the current limits on which employees’ compensation packages are affected, expanding the tax deduction limits from the four best-paid employees to the entire staff. Companies would be able to deduct up to $1 million per employee from combined salary and performance-based compensation.
CEO pay has regained its record high levels in the years since the financial crisis, hitting $9.7 million on average in 2012. The ratio of compensation for an average CEO to that of an average worker was 354 to one that year. In the financial industry, the rewards at the top are even more extravagant. The biggest banks in the world paid their top officers $11.5 million in 2012, on average.
Massive executive pay through stock options does more than just feed economic stratification and bilk taxpayers, though. Tying executive pay to stock prices creates perverse incentives for top corporate officers to commit fraud that will raise the value of their stock options in the short term, even if it is disastrous for the firm or the economy further down the line. While not specifically targeted at the financial industry, the Reed-Blumenthal measure might help defuse the “ticking economic time bomb” of Wall Street ethics.