Executive compensation and corporate governance

Over the past four decades, persistent concerns about executive compensation have prompted the U.S. Congress to enact penalty taxes aimed at golden parachutes, nonqualified deferred compensation, and overall pay levels that Congress considers excessive. These penalty taxes are tied together by two assumptions: first, that executive compensation generally represents a failure of corporate governance; and second, that tax policy can correct this corporate-governance failure. The first assumption is contested, and the second assumption is almost certainly wrong. Most of the tax rules for executive compensation have had only weak effects, and unintended consequences have often dominated the intended ones. The recent expansion of the $1 million cap on deductions for executive compensation will almost certainly prove counter-productive. It is highly unlikely to limit executive pay. And of greater concern, the expansion of the cap will increase the burden of the corporate income tax for investors and rank-and-file employees.