The Rittenhouse Review

A Philadelphia Journal of Politics, Finance, Ethics, and Culture


Thursday, August 01, 2002  

A READER WRITES . . .
A Day Late, Many Dollars Short

To The Rittenhouse Review:

There is irony in Pat M. Holt’s call for a $1 million limit on executive compensation.

Section 162(m) of the Internal Revenue Code prohibits a public company from deducting any compensation of over $1 million to its chief executive officer or to the four other employees with the highest pay. Two exceptions are any pay based on commissions or any “performance-based” compensation.

This limit first affected U.S. corporations in 1994. Until then, compensation was deductible only to the extent that it was “reasonable.”

The burgeoning of stock options in the 1990s was an unintended consequence of this provision. As long as stock option plans were somehow based on the performance of the company, were approved by outside directors and the shareholders, there was no effective limit on executive pay.

All this occurred after Congress thought it had the problem solved.

Never underestimate the power of creative accountants and lawyers!

Signed,
Tim Francis-Wright
Bear-Left.com

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