On Wednesday, January 17, the Senate panel included a provision in the minimum wage legislation that would limit to $1 million annually the amount of executive pay that a company can defer and protect from taxation. The remaining income would be taxed, even if it is being received in later years.
The measure was included in the minimum wage bill to help pay for $8 billion worth of tax breaks for small businesses that are designed to ameliorate the impact of raising the minimum wage from $5.15 to $7.25 during the next two years.
Senate staff members estimate that limiting the tax deduction on executive compensation will generate about $800 million in savings during the next 10 years.
On January 10, the House passed a bill that would increase the minimum wage by the same amount the Senate bill does. The House version, however, doesn’t contain any small-business tax breaks or the executive pay provision.
Although Senate Republicans have been the most vocal about wanting to help small businesses adjust to a higher minimum wage, the Finance Committee bill was approved by a unanimous voice vote and championed by Chairman Max Baucus, D-Montana.
Baucus and the committee’s ranking member, Sen. Charles Grassley, R-Iowa, highlighted the issue of deferred executive compensation in a hearing last fall. Now the idea is part of legislation heading for the Senate floor.
The move drew criticism from the business community, which argues that the market should determine pay packages, especially with companies facing competition for talent from private equity firms and hedge funds.
“Congress is again using its taxing power to interfere with decisions made by companies who in good faith decided who and how much they’re going to pay,” says Mark Ugoretz, president and CEO of the ERISA Industry Committee, an organization that represents employers. “You’ve got Congress making decisions on headlines rather than on what’s good compensation policy, which is better left to companies themselves.”
But Congress is slow on the draw when it comes to compensation reform, according to one expert.
Activist shareholders and boards of directors have taken steps to minimize shareholder dilution through stock awards to executives, limit severance packages and emphasize pay for performance, says Steve Van Putten, Eastern region practice leader on executive compensation for Watson Wyatt.
“There are a lot of market forces that take care of executive pay without legislative involvement,” Van Putten says.
In addition, the use of deferred compensation mechanisms has been declining because of limits imposed by previous tax law and because executives believe that future tax rates will be higher than today’s 35 percent rate, he says.
The Senate committee’s action comes as Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, has indicated that he will put executive pay high on the agenda of his panel. He will introduce a proposal that would allow shareholders to vote on executive pay.
Ugoretz says Frank’s efforts focus on corporate governance, which is different from what the Senate is doing in the minimum wage bill.
“I would not classify what happened today as meaningful [executive compensation] reform,” he says. “It’s a revenue raiser.”
The fact that it’s in the bill at all, however, may be a problem for the House. Under the Constitution, tax measures are supposed to start in that body, not in the Senate.
If the Senate passes the finance committee bill, it may be blocked from going into House-Senate negotiations on a final minimum wage measure by Rep. Charles Rangel, D-New York and chairman of the House Ways & Means Committee.
In similar situations in the past, the Senate has attached its tax bill to one that has previously been passed by the House. But since Congress is at the beginning of its session, there are no House tax bills available as vehicles.
Before crossing that bridge, however, the full Senate has to pass a minimum wage bill. It’s difficult to predict whether the executive pay provision will generate much debate. Only one question was raised about it at the January 17 finance committee hearing.
What is sure to be debated is whether the minimum wage bill should be adorned with tax breaks for small businesses. Most House Democrats and many in the Senate as well as their labor allies want a “clean” bill that focuses only on the minimum wage.
Sen. Charles Schumer, D-New York, is among those advocates. But he is resigned to the fact that the small-business provisions are required to cobble together 60 votes, the number need in the Senate to end debate and vote on legislation.
“We live in a bipartisan world here,” he said at the finance panel meeting. “The tantamount desire is to come up with an agreement where we can get something done.”