Paul L. Caron

Friday, June 21, 2013

Walker: A Tax Response to the Executive Pay Problem

David I. Walker (Boston University), A Tax Response to the Executive Pay Problem, 93 B.U. L. Rev. 325 (2013):

Many observers believe that that the public company executive labor market is deficient and results in systematically excessive compensation. This Article accepts that premise and considers potential regulatory responses. Specifically, this Article proposes and analyzes a two-pronged tax response to the problem of excessive executive pay – the imposition of a surtax on executive pay in excess of a threshold combined with investor tax relief. These two prongs respond to the chief concerns raised by excessive executive pay. The imposition of a surtax would reduce the after-tax income of executives, which would directly address the unfairness of excessive pay and the effect of excessive pay on inequality of resources. Investor tax relief would tend to reverse the inefficient distortion in capital allocation that results from excessive pay and would ensure that these distortions were not exacerbated by companies increasing executive pay to offset the surtax.

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Is this really a problem?

I left an Am Law 100 to work for a fortune 500. Seems to me that there were scores of partners at my old firm making $1MM plus for somewhat inconsequential work (credit agreements; fund formation; ERISA; papering routine M&A transactions). At my new company, we have a relatively small group making that kind of cash, and their decisions directly impact tens of thousands of employees and even more shareholders.

Maybe it's just by comparison to where I started, but to me our execs don't seem that overpaid. If you have a multi-billion dollar P&L and thousands of employees, you should make more than a radiologist in San Antonio....

Posted by: EL | Jun 21, 2013 11:44:57 AM

Why is "the public company executive labor market" the only market to be regulated? Are sports players "overpaid"? How about actors? Or law professors? And, as long as the busybodies want to regulate, why does the amount matter, if the issue is whether a person is "overpaid"?

Posted by: dan | Jun 22, 2013 6:06:38 AM

The problem with the article is its premise. Why single out executive compensation? Why not the compensation of superstar athletes, or star musicians or actors? What about the compensation of hedge fund managers? How about the compensation of plaintiffs' tobacco or asbestos lawyers? What makes executive compensation in publicly held companies so off-market that a governmental response is required?

Posted by: Douglas Levene | Jun 22, 2013 7:16:12 AM

If the problem is the agency costs incurred as a result of the separation of management and ownership, then a more direct way to control those costs would be to free up the market for corporate control. Outlaw the pill and staggered boards, and let the market control agency costs. Outsized executive compensation (in relation to the value provided by management) would signal value to a raider and attract hostile raids. The potential for a takeover is far more likely to deter executive overreaching than higher taxes. By comparison, the tax proposal suggested is over broad, since it punishes executive compensation that is richly deserved along with "excessive" compensation.

Posted by: Douglas Levene | Jun 22, 2013 7:59:07 PM