Squeezing the Balloon Once More, and Expecting a Different Outcome
Posted by Marc Hodak on January 23, 2015 under Executive compensation, Unintended consequences | 
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Americans seemed, at least for now, to have reached their saturation point on direct wealth redistribution. So for those who still feel we have more redistribution to do, they are trying via the tax code. A Democratic congressman has proposed to penalize executive pay if the company “fails [the] test of pay fairness.” Specifically, if a public company fails to raise the average pay of its workers making less than $115,000 by a percentage equal to the overall US growth in productivity plus inflation, the government will eliminate the deductibility of top executive compensation above $1 million. What could go wrong?
Well, let’s look at a brief history of attempts to use the tax code as a vehicle for social engineering.
We begin with the tax on “golden parachute” payments in 1986. Executives being ousted in takeovers got big payouts, while many of the workers left behind got laid off. Very unfair. So the government imposed an excise tax on those “parachute payments” when they became “excessive.” They felt that such a tax would either limit the compensation or limit the deleterious M&A activity. How did that work? Employment agreements began to proliferate for executives stipulating that shareholders pay the excise tax should it be triggered. There were good business reasons for doing this. Given that this tax reimbursement was itself taxable, and the shareholders would be on the hook for that, too, the tax policy basically transferred a chunk of change from corporate treasuries to the U.S. Treasury. It didn’t affect the M&A activity. And it left overall compensation largely untouched.
