Tuesday, November 25, 2008


The cause of our current economic mucking fess can be explained in one word – GREED.

Let us take a look at one of the ways this greed has manifested itself in today’s economy.

Like New Jersey politicians suck the State Treasury dry with pork, CEO’s and other high-level executives of public corporations have sucked their companies dry with astronomical salaries, bonuses, benefits and entitlements totaling as much as hundreds of millions of dollars per executive, regardless of whether or not the corporation is actually profitable.

Just as the victims of the greed of NJ politicians are the State’s taxpayers, while the politicians continue to grow fat, the victims of the prevalent corporate greed are the shareholders and “normal” employees of the corporations, and ultimately when the company is “bailed out” all American taxpayers, and the CEO beneficiaries continue to grow fat. Even if discharged they walk away with millions.

The Internal Revenue Service often goes after the owners of closely held one-man and family corporations to claim they are receiving “excess compensation”. The IRS can audit such a company, determine that the salary paid to the owner is too high, and reclassify a portion of the payments as dividends. The IRS position is that salaries are excessive so that the owner can avoid the “double-taxation” of dividends.

On the other hand, the IRS can also audit a Sub-Chapter S corporation and say that the compensation is not enough. “Dividends” from Sub-S corporations, which take the form of pass-through of net profits via Form K-1, are not double-taxed, and the IRS claims that S owners take too small a salary to avoid payroll taxes.

Why can’t the IRS determine that the compensation package of the CEO of a publicly-held corporation is excessive?

Actually using the IRS is not the best solution. A law should be passed that requires the compensation package of upper-level corporate executives in excess of a certain base amount, the combination of salary, deferred compensation, bonus, stock options, benefits, etc, be voted on by the corporation’s shareholders at the annual meeting. The law should also indicate that compensation in excess of the base must come from current “earnings and profits” – so a corporation that is losing money cannot pay its CEO $500 Million!

I believe in giving credit where credit is due. Congress is so rarely entitled to credit for smart thinking or action – but they are, at least to some small degree, in the case of the recent “Don’t Call It A Bailout” Act. As reported in an analysis of the Act by NSTP –

The deduction for compensation paid to a ‘covered executive’ of any financial institutions participating in the bailout is limited to $500,000 per year. Deferred compensation and parachute payments are taken into account when applying this limit.” It does not limit the ability to pay more than $500,000 – just the deductibility of excess payments. While too little too late, at least it is something.

So what do you think?


1 comment:

Anonymous said...

Call it poor leadership or poor oversight! Oversight for economy and the business drops on the Congress. Greed is the integral factor. It really is depressing. When the funds and money pours in everyone is full of smiles and tries to figure out how to get more in their pockets. When the Party ends everyone looks to see who can be blamed. It’s time we need some Reality Check.