Presentation for Accounting Class - Executive MBA Program Tax Overhaul Would End Company Breaks for Executive Pay Proponents say proposal would generate about $9.3 billion in additional government revenue over 10 years. By Ezequiel Minaya December 15, 2017

1. Tax Overhaul Ends Company
Breaks for Executive Pay
Proponents say proposal would generate about $9.3B
in additional government revenue over 10 years
Frank Cunha III, AIA
Executive MBA Program
Montclair State University

2. Current Law
Corporate Tax Breaks
• Decades-old corporate tax break for
performance-based pay of top executives faces
elimination under current tax bill, as Republican
lawmakers say it has failed to rein in
compensation.
• Current law caps company deductions
for executive compensation at $1M.
• Write-offs over $1M are allowed for certain types
of compensation, most notably performance-
based pay, often cash or equity promised to
executives.

3. • More than a quarter—28%—of executives
had taxable compensation above the $1M
limit.
• That figure would rise to 70% under the
proposed rules, partly because finance
chiefs, previously excluded, would now be
included.
• The new rule would apply to
taxable years beginning in 2018.
Taxable Compensation
(Study by Prof. Murphy)

4. • Government officials estimate the proposal would
generate about $9.3B in additional tax revenue
over 10 years.
• Critics of the proposed move say the added taxes
would raise the cost of attracting and retaining
company leaders.
• The 1993 provision intended to incentivize
companies to keep base salaries and bonuses
under $1M and push for better governance with the
tax break for performance-based pay.
Tax Revenue – Almost
$10B Over 10-Years

5. • The rule applies to the compensation of the chief
executive and the next three highest-paid executives.
• Other forms of compensation that would now be taxed
include commission-based pay and retirement income
from qualified plans or annuities.
• Temporary Grandfathering Provisions. Tax-deferred
accounts and benefits attributable to compensation
earned before January 1, 2018, would be grandfathered
and would retain their tax-deferred status until the later of
December 31, 2025, or the date those accounts and
benefits become vested.
Proposed Law - Corporate Tax Breaks

6. • Median stock-based compensation for large-cap
company chief executives jumped 44% over the last 5
years, while salaries increased about 10%, according to
Equilar.
• Lawmakers argue that current norms “have resulted in a
shift away from cash compensation paid to senior
executives in favor of stock options and other forms of
performance pay”
• The shift has caused “perverse consequences as some
executives focus on—and could, in rare cases,
manipulate—quarterly results…rather than on the long-
term success of the company.”
Proposed Law - Corporate Tax Breaks

7. • The loss of the tax break could prompt a few
companies to stop using stock options but
competitive pressures may play a bigger role.
• Peer practices are very, very strong in the world of
executive pay. In the end, companies would just
pay the bigger tax bill.
• “It’s like the luxury tax in baseball. That certainly
doesn’t stop the Yankees and Dodgers from getting
the players they want.”
Proposed Law
Corporate Tax Breaks

8. Wall Street Journal “Tax Overhaul Would
End Company Breaks for Executive
Pay” By Ezequiel Minaya (published Dec.
15, 2017)
Sources & References