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This is a volatile and problematic topic.

The US tax code requires that only compensation that is reasonable and necessary may be deducted as a legitimate corporate business expense. When shareholder/officers pay immense sums to themselves, some of that is occasionally challenged as an excess benefit transaction that should more properly be classified as a dividend distribution rather than as simple employee pay for business services. Having been involved in hundreds of such cases from the examination agent level to the Federal Tax Court trial level, I know how difficult it is to "define" the upper limit of ordinary & necessary pay.

Such determinations become easier when the executive compensation is set by an independent committee of the board of directors operating at arm's-length distance from the affected executives. Objective owners (shareholders and their agents) are unwilling to spend their money on unnecessary cash, stock dilution and/or executive perquisites. Simple self-interest says that you don't pay a penny more (or less) than is required to attract, retain and engage/motivate competent talent.

In the final analysis (absent regulatory challenge), what organizations pay their leaders is the business of the owners rather than the general public. If those who own the biz think Sally is worth $XYZ, it is their money, not yours.

The media, obsessed with inflammatory hot buttons with which to energize public opinion so as to increase their readership and advertising rates, loves to incite envy. Note that even the labor unions who are quick to condemn greedy CEOs are very reluctant to willingly disclose what their top executives earn. But regular corporations in the US and Canada are required to openly publish compensation metrics ... so they are easy targets for demagogues to attack.

Rather than obsess about a non-issue, why don't we instead focus on how each worker can maximize his/her productivity to enhance their individual values in their enterprises. What can YOU do to earn that kind of money?

No one refuses to watch professional sports because of the millions earned by grown men and women playing games. Postal workers earn more than ditch-diggers, too, but no one is bothered by that. The guaranteed salaries of news-readers greatly exceed the incomes of paramedics, firefighters and police officers without any backlash, as well. Pay for them is rarely criticized. CEOs, however, who get either the credit of the blame for all organizational results, are blamed because that heavy burden carries a high price-tag to their employer.

Why is it considered outrageous when a bunch of shareholders vote to give a LOT of THEIR money to a few of their employees in hopes that those key workers will produce even greater wealth for them in future stock dividends or equity growth? The reality is that the very tiny group of highly paid CEOs tend to be complete mercenaries ... or they would not earn so much. Pay them less, they gripe and jump ship, disrupting long-term strategies and arguably causing financial losses that exceed what their pay demands would have cost.

Personally, I think that all executive compensation in excess of twice the norm (median) for comparable services at like enterprises (per industry and size) should be exempt from tax deductibility as a business expense. If Mogul Industries wants to pay CEO Sally Super three times the going rate, they should be willing to pay the tax on a lot of that compensation rather than be allowed to write it all off. Either way, it's their money ... if she's so critical, then her pay should not be an issue to them or to the public, as long as they get their share.

Just an opinion, of course.

Yes, that's an arbitrary formula as well, but it's a lot simpler than the convoluted explanations that are otherwise offered to explain what really can't be easily explained: the judgment of compensation committees of owners.

Hi Chuck,

It’s not just optics; many CEOs are grossly overcompensated no matter how complex the obfuscation. The CEO pay spiral is riddled with conflicts. The board hires an exec pay consultant, the consultant recommends higher CEO pay – because everybody’s doing it, and ties it to things like share value (which the CEO can artificially inflate to hit bonus targets), the CEO raises the board’s compensation… around it goes.

CEO pay has grown 90X faster than typical worker pay since 1978, outpacing the S&P and every other economic indicator. It’s absurd. When compensation consultant Milton Rock first hatched his “external equity” idea, I’m sure he never imagined the monster it would become. Companies now routinely measure CEO pay only against other “peer group” CEOs – and the peers are always companies that pay their CEOs the most. CEO pay is rarely compared to internal comparators, because for some reason the CEO is now considered to exist up in a separate realm. Such elitism defies common sense and is, I think, antithetical to American meritocratic norms.

In my opinion, excessive CEO pay is a root cause of the current ills of this country. The .01% - .001% are sucking money out of this economy at a rate not seen since the 1920’s. The middle class is nearly destroyed, the resulting angst (predictably) giving rise to the embrace of angry populism and anti-immigrant, nationalist (protectionist) politics, which are now eating away at the soul of our nation.

In my experience, CEOs want power – power to make things happen, to effect change, to achieve a vision, whatever. I think most of these folks would still want to be CEO even if the job paid substantially less. And to those who say high CEO pay is the key to corporate performance, I say Sweden’s low CEO pay and strong corporate performance shows that connection to be dubious.

Thus, I think CEO pay should be capped at a ratio of something around 50x. Director compensation should also be capped (and probably should be equity only). The EU has already moved to rein in CEO pay, with binding shareholder resolutions every 4 years and detailed remuneration reporting requirements for executives and board members. The US needs to follow suit.


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