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 this week 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 annual 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.
Camp, 60, said in a brief interview outside his office yesterday that the executive compensation changes were part of an attempt to promote equity in the U.S. tax code and to ensure that the plan didn’t increase the federal budget deficit.
“A lot of the provisions in the code have been for specialized groups or individuals or behaviors, and we’re trying to get at as many of those as we can,” said Camp, chairman of the House Ways and Means Committee.
Elson said he didn’t think Camp’s 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 cover payments made to their beneficiaries after they die.
Among CEOs of companies in the Standard & Poor’s 500 Index who had been in their jobs for two full years or more, 93.4 percent received at least $1 million in total cash compensation excluding perks and equity compensation, according to a May 2013 study by Equilar Inc., which compiles data on executivepay.