Dan Walter's latest Blog Article - "Executive Compensation: The Political-Taxation Conspiracy"

Executive Compensation: The Political-Taxation Conspiracy

We
hear the cries every day. “Executives make too much money. Let’s raise
their taxes!” “Executives are  our job creators. Let’s cut their taxes!”
Perhaps key members of both sides of this argument are keeping the
focus on compensation levels to deflect from where taxes and political
contributions come from. Are there underlying reasons for politicians to
avoid strong support for performance-based compensation?

Politicians don't necessarily dislike performance-based compensation, in fact section 162(m) has a performance-based exception built in.  Political rhetoric is all about getting elected, and lets face it, the 99% have more votes than the 1%.  Considering that fact, it's amazing the politicians aren't falling over each other to see who'll raise taxes on the 1% the most.

Hi Steven,

I think that politicians may like the concept of pay for performance, but not the reality of it.  While it is something that is seemingly supported by the "99%" (a term of art at best), the actual implementation of true pay for performance has little upside for politicians.

And, of the 99%, a minority actual vote at every level, including local and regional levels.

This means that there is  big upside to keep pay high, and a big downside to reducing it.  The upside and downside are driven by the same thing.  Whether through taxes or political contributions, both are driven by the same thing....executives sharing the wealth.  The difference is in the case of taxes they are sharing the wealth for a broad group of society, with political contributions they are benefiting a small group of society (sometimes just the politicians and their own interests)

Below is my full article, for those who have not read it.

We hear the cries every day. “Executives make too much money. Let’s
raise their taxes!” “Executives are  our job creators. Let’s cut their
taxes!” Perhaps key members of both sides of this argument are keeping
the focus on compensation levels to deflect from where taxes and
political contributions come from. Are there underlying reasons for
politicians to avoid strong support for performance-based compensation?

In this election season, we are all aware that the large contributors
to political races are often people who make large sums of money. It’s
no surprise that some people believe that politicians favor the needs of
those who provide funding for their campaigns. Tax season has just
begun and it has its own political links.

Not so surprisingly, the individuals who pay the largest amounts in
tax dollars are generally those who are the highest compensated. Most
people, even those who are paid these large amounts, would say that this
is a fair system. But, what happens if compensation levels drop, as
will more frequently happen as companies focus compensation on pay for
performance?

A Feb 29, 2012 article, “Bonuses Dip on Wall St., but Far Less Than Earnings,”
in the DealBook section of the New York Times, discusses how Wall
Street bonuses are forecasted to drop 14% at a time earnings are
forecasted to drop more than 50%. The article was essentially a
discussion about the lack of linkage between pay and performance, but a
small section caught my attention. It talks about the impact of the 14%
bonus decrease on New York State and City budgets.

“Still, a dip in year-end cash
compensation is cause for concern for New York government officials.
Before the financial crisis, Wall Street accounted for 20 percent of the
state’s tax revenue. Last year, that tally was 14 percent. For New York
City, the share dropped to 7 percent of tax revenue from 13 percent
over the same period.

“The city budget is dependent on a
very small group of people — the 1 percent, if you will,” said Nicole
Gelinas, a senior fellow at the Manhattan Institute. “If the 1 percent
isn’t doing well, the city’s not doing well.””

Imagine, that instead of a 14% decrease in variable compensation,
companies didactically followed “pay for performance” to the exact level
demanded by some of its most ardent supporters. In the case of Wall
Street in 2012, this would mean a drop in related taxes of 53%. In terms
of real dollars, we can use the estimates provided by the article. It
claims that in 2011 “New York firms paid roughly $20 billion in year-end
cash compensation.” First, this specifically removes the changes due to
equity compensation, which us comp pros know is a big piece for this
level of employee. Second, $20 billion generates a lot of tax revenue.
New York State income tax is about 6.85%. New York City income tax is
about 3.65%. That gives us a combined local rate of 10.5%. 10.5% of $20
Billion is $2.1 billion in tax dollars. That’s a lot of school lunches
and road repair. Cutting this in half, to match corporate performance,
would mean tax losses of more than $1 billion! And, that’s just in the
city and state of New York!

Of course, this isn’t just a Wall Street problem. Local newspapers
around the country regularly create lists of the highest paid executives
in their area. Pay for performance decreases would impact the
contribution potential of every one of these people. In states, or other
areas, with income taxes, pay decreases would also directly impact
local budgets. Consider the case of California, where the budget was
decimated by the fall of the stock market and subsequent lost tax income
that stock options and other equity compensation provided.

As long as we have political races, we will have at least some level
of conflict with reductions in executive pay. As long as we have taxes,
we will have additional conflicts between the needs of the public and
executive pay. Since neither of these issues is going away in our
lifetime, perhaps we should get them out in the open and start
discussing how to plan according on all sides of this equation. The
title of this piece uses the hyperbolic term “conspiracy.” I believe
that is a gross overstatement. The political and taxation ramifications
of pay for performance are simply realities that we have yet to fully
address. It will be interesting to see how this works a decade from now.

Dan Walter is the President and CEO of Performensation
an independent compensation consultant focused on the needs of small
and mid-sized public and private companies. Dan’s unique perspective and
expertise includes equity compensation, executive compensation,
performance-based pay and talent management issues. Dan is a co-author
of “The Decision Makers Guide to Equity Compensation” and “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a
free networking group. Dan is frequently requested as a dynamic and
humorous speaker covering compensation and motivation topics. Connect
with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay