Washington's Plans May Result in Even Higher Executive Pay | Cato Institute

Washington's Plans May Result in Even Higher Executive Pay | Cato Institute: "In 1993, Congress decided it would use the tax code to “improve” (i.e., reduce) executive compensation in publicly traded companies." "Salary was bad. Stock options were tax favored."

"In 1992, the government thought that managers were too risk averse. Stock options were seen as the magic bullet for making managers act more aggressively in the shareholders’ interests. Today, many in Congress are blaming U.S. executives for causing the financial crisis precisely by engaging in “excessive” risk-taking. What they fail to mention is that it was Congress’s own tinkering with the tax code that led to the very compensation packages that incentivized the risk-taking."

"A provision in the 1992 tax law required that executives meet certain “objective” performance measures in order to qualify for incentive-based (tax deductible) pay. In the scramble to come up with objective metrics on which to base executive pay, cottage industry “executive compensation consultants” emerged as the most important architects of executive compensation plans."

“the use of these compensation consultants, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not.”


The government also has tried to regulate executive compensation by requiring greater disclosure of the details of compensation plans. Perversely, this too has contributed to an increase in executive pay.

How so? No self-respecting board of directors is willing to admit that their company’s CEO is below average. So anytime the new disclosures indicate that an executive’s pay is below average in any way, a pay increase is ordered.