Wednesday, September 06, 2006

More Buzz Around Executive Pay

Well, the 2006 election cycle is in full swing now since the Labor Day weekend. We will probably see a lot of legislative "miracles" in the coming weeks. There have been some serious cries from the Left about executive pay packages. There is a certain appeal involved with being critical of executive pay. Surely, these executives are making more money than they can ever spend, so why should they be getting paid this much when so many people are struggling to get by?

Truth be told, as a stockholder, I am not too thrilled with some of the exhorbinant pay packages for executives. I would like to see more money paid out in the form of dividends. However, I do not hold much weight in corporate voting because I do not hold a large enough stake in any company. Honestly, I only own stock in one company, directly; the rest of my ownership is through mutual funds and index funds. The executives of these companies tend to have a pretty large chunk of stock vested in their employer, so they have considerable pull, themselves.

Senator Charles E. Grassley (R-Iowa) is proposing the repeal of a 1993 tax break that makes executive pay over $1 million to be tax deductible if it is tied to performance. Please note, in most all situations, employee pay is deductible as a business expense, so this is not something that was made especially for executives, and not normal employees; as a matter of fact, this was meant to provide a compromised way to end special legislation made against executives. Effectively, companies are paying their executives with stock options to get around paying a lot of taxes. And further, executives get the ability to have lower tax rates with this approach because they get their personal revenues from capital gains, rather than a salary. This allows them to by-pass a lot of standard income tax, as well as some payroll taxes. This has never been more apparent than in situations where executives are only taking $1 in salary. Strictly speaking, these stunts are mostly public relations tools, and the rest of it is for tax benefits to the employee and the employer. Ironically, the executives that tend to pull the "benevolent" $1 salaries tend to be the more liberal bunch that just want to put on a dog-and-pony show to put them in the good graces of their loyal followers. Examples include Steve Jobs (Apple and Pixar), and Eric Schmidt, Larry Page, and Sergey Brin (Google).

So, the big debate is that more rich people are getting out of paying their "fair share" of taxes. Considering that the absolute majority of taxes are paid the wealthy, I just don't buy that. The politicians on the Left are putting on their own dog-and-pony show pretending that they care about the poor and middle class in an effort to buy votes. While the Democratic Party seems to be leaning to the left, I still think the politicians are out more for their own personal well-being than anything. So, they scream about executive pay and they get their constituents all worked up, and hopefully earn some more votes. But, they are not the only politicians putting a dog-and-pony show. Senator Grassley, a Republican, is doing just that by proposing this repeal. The reasoning cited here is that the government could get more tax revenue from this situation. However, given the findings, it would only generate about $3 billion in additional revenue by taxing the extra $10 billion from these corporations. To average citizens, $3 billion sounds like a lot of money... and it certainly is. However, in the grand scheme of things, the Federal Budget, it is a miniscule drop in the bucket that will have nearly a zero sum effect. So, this is just more evidence that this is another dog-and-pony show. The only effect I can see from this is that the stock market is going to take a hit from it, like it always does when congress is in session; and that is going to hurt average citizens who are trying to save for their retirements in 401(k) and IRA plans.

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