Executive pay about to become more costly

For years, lawmakers and regulators have struggled with how to rein in the multimillion-dollar pay packages earned by corporate America’s top executives.

Despite legislation signed in the 1990s attempting to cap C-suite pay, average salaries have more that doubled over the past 20 years.

One provision in the massive tax overhaul passed by Congress late last year attempts to place new curbs on pay. Under the measure, companies that dole out millions in performance bonuses to top executives could face a heftier tax bill.

Netflix already has responded by raising the salary of three of its top executives and dumping a short-lived program that tied their pay to company performance. Corporate boards across the country are considering whether to do the same, executive compensation experts say.

How companies, particularly Wall Street, pay their top executives has been thorny issue for years. Then-President Bill Clinton campaigned against excessive CEO pay and pushed a measure to cap at $1 million the amount that corporations could deduct from their tax bill for top executives’ compensation. But the law also included a compromise: Companies still could deduct pay over $1 million if it was “performance-based.”

Instead of stopping the growth of executive pay, the law helped supercharge it, according to academics who have studied the issue. Companies that paid their CEOs less than $1 million a year often boosted their salary and many began looking for ways to take advantage of the loophole for deducting the cost of “performance-based” pay, they said.

In 1989, according to the left-leaning Economic Policy Institute, the median value of annual CEO compensation was $2.7 million. By 1995 it was $6.6 million, and it reached $13 million in 2016.

“Market forces drive CEO pay. There is a market for CEOs, just like there is for football coaches and actors, and some of them are well paid,” said Jim Barrall, senior fellow in residence at the UCLA School of Law and former chair of the executive compensation practice at Latham and Watkins.

“History proves that when the tax code has been used to limit executive compensation, it has not worked and has had unintended consequences,” he added.

Investor advocates complained for years that corporations were taking advantage of the tax policy. The deduction saved the top 20 banks $725 million on performance bonuses between 2010 and 2015, according to an Institute for Policy Studies report.

In 2006, then-Securities and Exchange Commission chief Christopher Cox told a Senate committee that the law “deserves pride of place in the Museum of Unintended Consequences.”

The 2017 tax law does away with the deduction for performance-based pay, potentially steering $9.3 billion to federal coffers over the next 10 years, according to the Joint Committee on Taxation.

But compensation experts say the change in tax law is not likely to reverse years of upward pressure on executive pay. If anything, companies are likely to just make such pay less dependent on performance-based bonuses and give executives a higher salary, they say.

“Some people will hope this reduces executive pay. I don’t think it will,” said Alan Johnson, managing director of pay consultant Johnson Associates.

Some companies already are adjusting their policies. Netflix began offering stock-based bonuses to three of its top executives in 2015, taking advantage of the tax deduction.

Last week, the company said it would ditch the bonuses and increase the annual salary for the executives in 2018. For example, in 2017, Netflix’s Chief Content Officer Ted Sarandos earned a $1 million salary and bonus target of $9 million. For 2018, his base salary will be raised to $12 million, according to a Securities and Exchange Commission filing.