- The Republican tax overhaul removed the deduction on CEO performance-based bonuses in order to rein in burgeoning CEO pay, but companies are responding by removing performance-based pay policies and raising CEO salaries instead, The Washington Post reports.
- The tax measure may have the opposite effect of what lawmakers intended if more companies raise CEO salaries and end performance-based bonuses, sources told the Post. Companies argue that CEO pay is market-driven and that the demand for CEOs is high. Removing the deduction would add $9.3 billion to federal funds through the next 10 years, says the Post, citing figures from the Congressional Joint Committee on Taxation.
- The new law also lowers the corporate tax rate from 35% to 21%; the Post says this new rate more than offsets the bonus-deduction loss to corporations. An analysis from the Economic Policy Institute shows an upward trend in annual CEO compensation.
This is yet another effect of the GOP tax overhaul that will require attention from employers.
Tax rates are generally a financial-side issue for businesses, but the flip side of this issue is executive compensation. Since the U.S. Security and Exchange Commission's (SEC's) crack down on Wall Street companies like Enron in the late 1990s, stockholders became more vigilant about CEO's high earnings compared to their performance. The same issue resurfaced during the 2007 recession.
In an October Willis Towers Watson poll, employers said they were concerned about employees' reaction to SEC-required reports that could reveal large disparities between CEOs' wages and their own. According to EPI research, average CEO pay is 400 times more than the average worker's earnings. It's something to keep an eye on, if for no other reason than that companies with highly paid CEOs tend to garner lower ratings from workers.