By Steven Clifford
FORTUNE – As part of an effort to revamp America's complex tax code, U.S. Congressman Dave Camp last week proposed to curb CEO pay by tightening a tax giveaway created in the 1990s. Perhaps unexpected for a Republican, Camp's plan would raise $12.1 billion in taxes over 10 years by prohibiting U.S. companies from taking income-tax deductions for their top executives' pay exceeding $1 million, even if it's based on performance.
Currently, laws exempt performance-based pay from the $1 million limit. The problem with that is it has encouraged companies to raise base salaries to that level and reward executives with options.
Camp's proposal is a welcome move to help tame the ballooning CEO pay we've seen over the years. CEO pay began to escalate in the early 1980s, but salaries took off in big ways after the passage of the Omnibus Budget Reconciliation Act (OBRA) in 1993, which allowed unlimited deducibility of executive pay based on performance; at the time, President Bill Clinton signed it into law and it has been one of his greatest follies. In 2000, CEO pay was 383 times that of the average worker, compared with 123 times in 1995, according to a June 2012 study by the Economic Policy Institute.
During his 1992 presidential campaign, Clinton had promised to end unlimited tax deductibility for executives earning more than $1 million. He later softened his stance and capped deductibility at $1 million except for "performance pay." Once CEOs, compensation consultants, board directors and corporate lawyers caught on to the new law, they realized CEOs could be paid unlimited amounts so long as they could pass it off as "performance based."
One immediate consequence of OBRA was that many companies were forced to replace bonuses paid at the discretion of the board – subjective bonuses – with bonuses determined by rigid formulas. That's because, under IRS regulations, plugging objective data into a formula would qualify as "performance pay" no matter how absurd the result, but a discretionary bonus based on the board's after-the-fact subjective judgment will not. The mandate of blind objectivity proved far more remunerative for CEOs than discretionary bonuses had been.
By restricting salary and requiring performance pay, the government inaugurated the mega-bonus era of the mid-1990s. Although long-term bonuses had been awarded to some executives as early as the 1940s, bonuses were not common enough to make a noticeable impact on median compensation until the late1950s. Between 1950 and 1970 bonuses ranged between 15% and 20% of current compensation, with no obvious trend. Today, the proportions are reversed. Salary is typically a small portion of CEO compensation, normally only 10% to 20% at larger companies.
Stock option awards almost always qualify as performance pay. Mega option awards and a booming stock market fueled the exponential growth in CEO pay between 1995 and 2000. In a 2011 paper, Kevin Murphy, professor of finance and business economics at the University of Southern California, wrote, "The explosion in stock options that led to the escalation in pay was in large part the (arguably unintended) consequence from government policy." So let's hope Congressman Camp's proposal gains momentum.
Steven Clifford is retired CEO of King Broadcasting Company and has served on over a dozen private and public company boards.
The beaches are inviting, but Puerto Rico's political risks and its high crime rate should make wealthy tax-dodging Americans think twice before moving.
By Cyrus Sanati
FORTUNE -- John Paulson and other plutocrats should think twice before moving to Puerto Rico in search of a tax break. While the Caribbean Island's recent push to lure wealthy individuals from the U.S. mainland seems like a great deal, there is no guarantee that MOREMar 12, 2013 10:31 AM ET
It's easy to predict gloom and doom for the U.S. economy. But strong growth and job recovery are no pie-in-the-sky fantasies.
By Geoff Colvin, senior editor-at-large
FORTUNE -- In your sleep you can name 10 reasons 2013 will be lousy for business and the economy. So can I. But analyzing only the downside is a bad habit; missing a boom is at least as dangerous as missing a bust. So let's MOREJan 18, 2013 5:00 AM ET
Whether or not the president and lawmakers reel us in from the fiscal cliff, the tax debate is sure to keep going.
By Becky Quick, contributor
FORTUNE -- It's an argument as old as politics itself: How do we responsibly finance the system of government that provides the basic framework of our society? Taxation without representation was at the core of forming this country. Now the rate and distribution of taxes MOREDec 7, 2012 5:00 AM ET
The President, key conservatives, and even some of the nation's biggest corporations are leaning toward trading special breaks for lower rates.
By Nina Easton, senior editor-at-large
FORTUNE -- The economy coughs and sputters and threatens to stall out -- again. Growth slows; unemployment ticks back up to 8.3%. Congress shamelessly convenes a five-week recess, while the President camps out under the comforting applause of the campaign trail.
The absurdity of Washington's inaction MOREAug 29, 2012 5:00 AM ET
Our tax system helped get us into our economic mess. Now it can help get us out.
By Sheila Bair, contributor
FORTUNE -- As we undertake the annual mind-numbing rite of filling out our tax returns, let us pause to reflect on the role our tax code played in the financial crisis.
What brought us the crisis? Overly leveraged financial institutions made high-yield mortgages to overly leveraged consumers. Financial institutions then concocted trillions of MOREMar 5, 2012 5:00 AM ET
Investment managers have held on to it for years, but 'carried interest' carries an odious loophole that needs to go.
FORTUNE -- Politics has moments when it's actually useful. Case in point is the uproar over Mitt Romney's tax returns, which may help rid us of a small but noxious and symbolic loophole worth several billion dollars a year to managers of investment partnerships.
I'm talking about "carried interest" -- finance-speak for MOREAllan Sloan, senior editor-at-large - Feb 8, 2012 5:00 AM ET
Done right, a flat tax can make the U.S. more competitive and help working people. So let's stop making it so partisan.
By Geoff Colvin, senior editor-at-large
FORTUNE -- Here's the bottom line on the hottest issue in the presidential campaign: A flat tax, done right, is a good idea. Herman Cain's 9-9-9 plan is definitely not a good idea. Rick Perry's plan is better but a bit murky. We'll be hearing much MORENov 8, 2011 5:00 AM ET
Our former president's remedy for our fiscal woes? Focus on jobs and mortgage relief - and clean up the tax system.
FORTUNE -- President Bill Clinton presided over one of the most robust economies in American history. And while some of his success may have been a result of timing and some luck, his leadership his ability to create a consensus, in particular surely had a role and has some people waxing nostalgic over Clintonomics. (Clinton has MOREOct 7, 2011 5:00 AM ET
Giving companies a tax break on repatriated profits may not lead directly to new jobs, but it would likely boost the economy by propping up the dollar and fueling stocks.
By Vishesh Kumar, contributor
FORTUNE -- When it comes to the hot button issue of a tax holiday for US corporate profits held overseas, many lawmakers are once bitten, twice shy.
That's understandable -- the last time Congress decided to give companies a MOREApr 29, 2011 5:00 AM ET
|The medical marijuana ad that never aired, despite contrary media headlines|
|2 million students missing out on college aid|
|GM raising Corvette prices|
|China to fight pollution with drones|
|Boeing reports wing cracks on Dreamliners|