BLOOMINGTON, Ind. — Sometimes Congress passes new tax policies in order to steer companies towards reworking how they pay workers.
In particular, in the Tax Cuts and Jobs Act of 2017, Congress cut the corporate tax rate from 35 to 21 percent, but in doing so also eliminated an exemption that allowed them to deduct up to $1 million a year in performance-based pay for top-executives from their taxes.
Performance-based pay is essentially compensation that is linked to the company’s performance in the stock market. Companies will use stock options to pay top executives instead of outright cash in these cases.
Eliminating this exemption was geared to try and push companies to back off on increasing CEO and top executive pay and then move that money towards increasing wages of regular workers.
“We were looking for a reduction in performance pay and an increase in salary,” said Bridget Stomberg, associate professor of accounting at the IU Kelley School of Business. “Then if you give an executive more guaranteed pay then the overall level of their pay should go down.”
But Stomberg tells Inside Indiana Business that that’s not what they saw as a result of the Tax Cuts and Jobs Act. The study shows the law did little, if anything, to change how large companies use performance pay.
“This is a situation where Congress maybe overestimated the tax motivations of companies using performance-based or stock-based pay,” Stomberg said.
Stomberg said that if solving income inequality is the big goal for some lawmakers in curbing what they believe is excessive CEO compensation, then she suggests pursuing other policy avenues away from tax-based policy to try and incentivize that goal.
