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How and why did bonuses become part of the compensation package for higher executive officers?
Well it's all about unintended consequence of government regulation. Prior to 1993 officers pay in publicly traded corporations were tax deductible by the corporation as a cost of doing business. The Revenue Reconciliation Act of 1993 and IRS codifying rule 162(m) changed the amount deductible. The Act and Rule influences compensation by limiting the deductibility of salary expense to $1 million for each of these executives. Deductibility above that ceiling was permissible as long as the excess came in the form of performance-based compensation, whether cash bonuses or equity-based compensation like options.
So government regulation created the environment and need for bonuses.
Further another rule, double taxation of dividend, created non dividend stock which flushed the board room with excess money. If a company decides to pay out dividends, the earnings are taxed twice by the government because of the transfer of the money from the company to the shareholders. The first taxation occurs at the company's year-end when it must pay taxes on its earnings. The second taxation occurs when the shareholders receive the dividends, which come from the company's after-tax earnings. The shareholders pay taxes first as owners of a company that brings in earnings and then again as individuals, who must pay income taxes on their own personal dividend earnings.
So, stock holders not wanting to be taxed twice said "We'll forgo dividend, just reinvest the money, grow the company and we'll take the reward in higher stock value." This of course left all of the earnings or profit in the company board room, available for... ... wait for it...... higher bonuses.
Government regulation caused the bonus issue, only by leaving well enough alone will the problem be corrected. But, alas that won't happen, they (the gov.) will meddle more and create another larger problem.
Jamie
Wasn't this part of what the Enron insiders were doing?
LOL. We, the taxpayer bailed the parasites out, we can damned well determine their paycheck. It was not the man on the factory floor that created this debacle, it was these worthless parasites. Time for them to learn what the results of failure are.
You stupid Rushpublicans on this board would reward failure to anybody that was already rich, and punish those that are middle class for success. You, and your minions, are what has put this nation in the present condition it is in. When your incompetant was given the White House by the Supreme Court, this nation was in excellant shape. Ol' a'W'ol ignored the warnings concerning terrorism, and lowered taxes at the same time as he lied us into an unneccassary war. Now we are reaping the rewards of the idiocy that you cheered on, and trying to ameliorate the damage, and you are trying to inflict even more damage on this nation. Real patriots, you fellow.
I agree. But it just seems to me that the rules changed AFTER they took the bailout money. Perhaps their decisions would have been different if they had been made aware of the strings. I'm no economist, but this just smells bad to me. If they pay back the TARP, will the strings be cut?