March 10, 2016
Is Section 162(m) Responsible for Income Inequality?
– Broc Romanek, CompensationStandards.com
Allan Sloane has written this Pro Publica piece entitled “The Executive Pay Cap That Backfired” that covers the well-worn topic of the unintended impact of Section 162(m). The following excerpt from this Cooley blog summarizes the piece:
To analyze the impact of Section 162(m), ProPublica and The Washington Post commissioned a study that looked at the history of executive compensation for the top 50 members of the S&P 500, excluding 10 companies (some of which were big, high-tech companies) that were not reporting in 1992 (the year prior to adoption of 162(m)). In 1992, only 35% of the covered executives were paid more than $1 million of income of the type subject to deductibility limits, compared with 95% in 2014. Given inflation, the article suggests, that’s not a big surprise.
What was a surprise was the following data from the study: “From 1992 to 2014, compensation per executive in the limited-deductibility categories rose more rapidly — by about 650 percent, to $8.2 million from $1.1 million — than compensation in categories such as stock options and incentive pay that aren’t subject to deductibility limits. The latter rose by about 350 percent, to $4.4 million from $970,000.” (Emphasis added.) That is, compensation that was subject to the tax limitation rose almost twice as fast as compensation excluded from the limitation.
I still believe my own explanation from 10 years ago – “An Open Letter to All Journalists” – does a better job of covering all the different factors that have led to skyrocketing pay. There are a myriad of factors, such as the 1992 change in the SEC’s rules that led to more fulsome disclosure – that in turn led to benchmarking databases and the slippery slope upward…