Tax Man Cometh Again: This Time for Executive Pensions
No more cream for fat cats if Congress gets its way. According to Financial Times journalists, Francesco Guerrera and Eoin Callan, the U.S. Senate votes this Tuesday to curb tax breaks tied to executive retirements. (See "Retirement tax will hit US executives - January 29, 2007). They write: "Under the new regime, executives would be allowed to defer up to $1m a year or the average of the previous five years' taxable salary, whichever is lower. Any sum above that would incur taxes and a 20 per cent penalty."
I could not find any details posted yet to the U.S. Senate Finance Committee website but I'll scour C-SPAN tomorrow for the exciting showdown.
The real shame is that, once again, we have a "one size fits all solution" that does not differentiate between "excessive" compensation arrangements and what's required to attract and retain leadership talent. Ben & Jerry's earlier use of a salary cap made it difficult to lure a CEO to Vermont, despite the promise of an unlimited supply of Chunky Monkey and Cherry Garcia (the low-fat version being my personal favorite). Ditto for other companies that did not heed the supply-demand dynamics of a competitive marketplace. (Click here to read "Putting a Ceiling on Pay: No Whole Foods executive can earn cash pay of more than 14 times what its average worker makes. Will other companies follow?" by Andrew Blackman, Wall Street Journal - April 12, 2004).
By extension, if deferred compensation at a certain level facilitates the hiring of a skilled CEO, why should it be discouraged? Shareholders may save money in the short-run but lose in the long-run. This could include 401(k) and defined benefit plan participants whose fortunes rise or fall with the price of company stock.
This story has legs, especially now that many experts predict a return to populism and a move against "mean, greedy executives."
Editor's Notes:
1. The topic of optimal executive compensation is broad and complex. However, there is real merit in letting companies self-police AS LONG AS shareholder stewards do what they are supposed to do. Be vigilant. Ask questions. Exercise proper fiduciary oversight.
2. Click here if you want to read last week's blog post about the proposed taxation of health care benefits.
