Editor, The New York Times
To the Editor:
But the ill and unintended consequences of another piece of tax-policy social-engineering needs greater attention. I speak of Internal Revenue Code section 162(m), a 1993 brainchild of Bill Clinton. Aimed at reducing what Mr. Clinton divined was excessive executive salaries, 162(m) eliminated the tax-deductibility of executive pay in excess of $1 million UNLESS such pay was performance-based.
Alas, as found by economists James Wallace and Kenneth Ferris, "One unintended consequence of the legislation was that executives' total compensation actually increased in the post-1993 period."* The reason is that a greater portion of executive pay was shifted into performance-based stock-options - which are both less transparent to shareholders than are annual salaries, and which give executives greater incentives to rig short-term results in ways that raise executive pay even as this rigging increases market volatility and reduces dividend yields.
Donald J. Boudreaux
Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser.