|
Edited on Tue Aug-04-09 06:44 AM by HamdenRice
You're on the right track -- if you think, as I do, that the right track would look something like the fairness in the mixed economy of the 1960s.
The government iirc, did not regulate exec pay directly but used the tax system.
First, you have to understand the connection between exec pay and taxes (which you may already). The money a corporation takes in is revenue. They deduct all their expenses and costs of production from revenue, and what's left over is "profit". The govt taxes profits, not revenue -- hence the corporate tax taxes corporate profits.
Included in expenses is the wages and salaries the corporation pays out. If I own a restaurant, and my revenue is $100,000, but pay waiters, cooks, etc., $80,000, then my profit is only $20,000. That's what I'm taxed on.
In a big corporation, those giant executive salaries, therefore, are deducted from revenue in order to calculate profits -- the amount the government taxes.
Long ago, the government realized that corporations could siphon revenue away without paying taxes by inflating executive pay. In my example of the little restaurant, if I saw that my profit was going to be $20,000, I could declare that I had paid myself, as manager, $19,000 executive pay, and I would reduce my taxable profit to just $1,000.
So the govt used to be vary wary of giant exec salaries as a way of avoiding taxation.
The solution was to figure out what reasonable exec pay was. Then the govt would say any exec pay over that amount cannot be deducted as an expense of doing business.
The effect wasn't to prevent the corporation from paying that enormous pay. But the effect was that the corporation would in effect pay much more in taxes, in effect paying tax on revenue, rather than on profit.
In other words, exec pay is tax free to the corporation. These old rules made excessive exec pay taxable to the corporation.
The people who were hurt by this, however, weren't the executives. It ws the stockholders, because it reduced profits (which ordinarily are distributed to shareholders) by subjecting them to excessive taxes.
So the second part of the solution was to work with the SEC and force the corporation to tell the shareholders, "hey shareholders, management is reducing your dividends by paying excessive pay to management, and subjecting the corporation to penalty taxes!"
Shareholders would vote management out of office if they did that.
The problem with recreating this system today is that shareholders are powerless these days. Management is so brazen, they would probably subject the corporation to penalty taxes, reducing shareholders dividends. After all they are already ripping off shareholders in so many ways.
We also need much higher taxes on the income as paid to the execs.
|