U.S. companies would be prohibited from taking income-tax deductions for their top executives’ pay exceeding $1 million, even if it’s based on performance, under a plan from the top Republican tax writer in Congress.
The proposal, released yesterday by Representative Dave Camp of Michigan, would tighten rules that Congress first put in place in 1993. Current law exempts performance-based pay from the $1 million limit. That encourages companies to raise base salaries to that level and reward executives with options, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
The executive compensation change would raise $12.1 billion over 10 years and help finance lower tax rates. Camp’s broader tax plan, which isn’t expected to become law this year, is a blueprint for future efforts to revamp the tax code. Companies and business groups are trying to prevent provisions that harm them from advancing.
Elson said he didn’t think the proposal would curb executive pay packages significantly, because tax policy tends to encourage creative evasion techniques and because companies will look for ways to pass along the costs.
“They’ll pay over $1 million, they won’t deduct it and the losers will be the shareholders,” he said.
The $1 million cap would apply to a company’s chief executive officer, chief financial officer and the top three other officers, according to a congressional summary. The limit would apply even after officers leave the company and would involve payments made to their beneficiaries after they die.
Camp also proposed two other significant changes to executive compensation -- limits on deferred compensation that would raise $9.2 billion and limits on pay for nonprofit executives that would raise $4 billion.
Marc Trevino, a partner at Sullivan & Cromwell LLP in New York who specializes in compensation, said companies would probably react by increasing base salaries and retaining performance-pay structures if Camp’s plan became law.
He said he didn’t expect companies to change pay packages unless Camp’s plan gains momentum in Congress. If and when that happens, the changes would be significant.
“The one thing you know is that a regular annual cash bonus, that works,” Trevino said. “That is least affected by this. But long-term deferred compensation structures like the ones that are being proposed for financial institutions around the globe, those would need to be evaluated in light of these tax changes.”