One for Executive Pay
Senate Provision Begins Push To Rein In Compensation
By Sarah Lueck
The Wall Street Journal
Tuesday. January 30, 2007
The Senate's likely passage this week of legislation raising
taxes on executive pay is just the beginning of a tough look
by the new Democratic Congress at big corporate compensation
The provision is attached to a bill that would raise the
minimum wage to $7.25 an hour from the current $5.15. It
would cap at $1 million a year the amount an employee could
place in certain tax-deferred-compensation plans.
Currently, there is no limit on how much compensation can be
deferred into the plans, allowing executives to put off
taxes for years on millions of dollars in pay.
The legislation also would limit the income-tax deductions
companies can claim for high-paid executives who left the
firm during the year. Combined, the two measures would
raise about $900 million in new tax revenue over 10 years,
according to congressional estimates.
And that may be just the beginning of the first extended
assault on executive pay from Capitol Hill since the last
time Democrats were in control, during the early 1990s. In
addition to tax changes, the new chairmen of the House and
Senate committees that oversee financial services say they
want to give shareholders more control over executive
Two forces are driving Washington's new focus on executive
pay. One is the Democratic Party's increasingly populist
appeal. In delivering the party's official response last
week to President Bush's State of the Union address,
Virginia Sen. Jim Webb put economic inequality alongside
Iraq as one of his broadsides against the White House.
"When I graduated from college the average corporate CEO
made 20 times what the average worker did," Mr. Webb said.
"Today, it's nearly 400 times."
At the same time, Democrats have pledged to live within
pay-as-you-go budget constraints that require new spending
or tax breaks to be offset by budget cuts or revenue
increases. Under those rules, executive pay makes a more
tempting target than, perhaps, raising middle-class taxes,
or cutting popular spending programs.
"We're in an environment where, because of pay-go rules,
Congress is having to look to find revenue," says Bob
Shepler, director of corporate finance and tax at the
National Association of Manufacturers. "They haven't been
shy about saying the highly compensated individuals are
where they're going to look first. Executives are an easy
but unfair target."
Despite that, it is unclear the tax changes for executive
pay ultimately will go anywhere. Business groups are
lobbying against the proposals, blitzing lawmakers with
letters saying they will disrupt compensation arrangements
that companies use to attract and retain top employees.
"The tax code is neither an appropriate nor an effective
means of regulating excessive compensation," wrote David A.
Heywood, general tax counsel for Lockheed Martin Corp., on
behalf of the taxation committee at Financial Executives
International, which represents more than 15,000 financial
Opponents of the new pay curbs say the Senate proposals
would hit compensation in investment banking, where large
bonuses often are deferred. They hope those arguments will
hold sway with the House's chief tax writer, Ways and Means
Chairman Charles Rangel (D., N.Y.).
Mr. Rangel has expressed reservations, saying in an
interview: "I don't want to get involved in setting
Mr. Rangel's aversion to the Senate executive tax has as
much to do with process as substance. The Senate measure is
part of a complex tax package that the chamber attached to
the minimum-wage increase. It includes $8 billion in tax
breaks for small businesses, such as restaurants, that might
be hurt by the mandated pay increase, and $8 billion in
offsetting tax increases, including the executive-pay
provisions and larger changes that would restrict certain
corporate tax shelters.
The House passed a "clean" minimum-wage increase with no
taxes attached, and the two chambers will have to work out
Even if the new compensation packages do become law, it is
unclear if they will have the desired effect -- or if they
will just push companies to come up with ways to get around
The new plan to curb deferred compensation is aimed at
reducing the escalating disparity between top executives and
other employees. Advocates note that while there is no
current limit on the amount of compensation that employees
can place in certain deferred-compensation plans, most
workers can add only $15,000 a year, tax-deferred, to their
One wrinkle in the proposal is that it actually sets two
limits: $1 million, or the average of the employee's
taxable pay for the previous five years -- whichever is
lower. Business groups contend that even midlevel employees
could find they exceed the limit for a given year and end up
affected by the new tax. Senate Finance Committee
spokeswoman Carol Guthrie said middle-income earners are in
different types of savings plans than those impacted by the
The other executive-pay provision would close what Senate
aides describe as a loophole. Current rules limit companies
to no more than $1 million a year in income-tax deductions
for certain types of compensation to their top-five officers
-- but only if the officers still are working at the company
at the end of the year. The Senate provision broadens the
$1 million deduction limit to anyone who served as chief
executive or one of the four highest-paid individuals, even
if they have left the company.
Supporters of the changes say they are meant to reduce the
use of huge exit packages, like the one likely to go to
Pfizer Inc.'s former CEO Henry "Hank" McKinnell. Mr.
McKinnell, who is slated to leave as chairman next month,
could walk away with a deferred-compensation package valued
at nearly $80 million.
Rep. Barney Frank (D., Mass.) says the Senate's
executive-pay proposals are just the opening of a broader
discussion of executive pay that is "always useful to
have." Mr. Frank, chairman of the House Financial Services
Committee, plans to hold hearings on executive pay in coming
months and introduce legislation giving shareholders more
power over compensation. "CEOs ought to understand it's a
further signal of how unhappy people are," said Mr. Frank of
the Senate proposals.
Write to Sarah Lueck at