Tax reform may not limit executive compensation: 4 things to know

House and Senate bills that propose to eliminate the tax loophole on deducting performance-based executive compensation may not limit massive executive pay packages, according to a Washington Post analysis.

The idea to limit executive compensation emerged in former President Bill Clinton's 1993 budget, which created the loophole that said companies couldn't deduct CEO pay over $1 million unless it was "performance-based." Many believe the loophole drove companies to pay more in stock options and certain performance-based bonuses, which contributed to massive growth in CEO pay. 

If the current proposals move forward, companies would no longer be able to deduct performance-based compensation for their CEO, CFO and three other highest-paid executive officers, meaning the maximum amount that is deductible would cap at $1 million.

Here are four insights from the analysis.

1. The Joint Committee on Taxation estimates that eliminating the exception would raise $9.3 billion in revenue over the next 10 years.

2. Companies already regularly forfeit the deductions when they pay salaries above $1 million or when they give out restricted stock grants that are not performance-based.

3. Companies tie CEO pay to what their peers make. Corporate boards examine what CEOs at other companies are earning to help set pay, which inflates CEO pay and is not affected by eliminating the tax loophole.

4. If the loophole on performance-based pay is eliminated, directors could give CEOs more fixed pay in the form of higher cash salaries or more stock that's not tied to performance. 

More articles on compensation: 
5 things to consider when assessing CEO compensation
How GOP tax plans change the tax treatment of executive compensation
2017 manager and executive compensation in hospitals and health systems — 4 findings

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