Change in the Law

Dear Agents of Change,

I apologize for my absence as I have been roughing it in beautiful Carmel California for a few weeks.

We have now received dozens of letters from lawmakers responding to our mail blitz.
The below bill (s. 1007) is a step in the right direction (as long as they don’t screw it up by adding junk to it). This bill follows a big part of our recommendation by requiring 60% shareholder approval if compensation exceeds 100 times the average employee.

Steve Hartnett

Senate Leader Introduces Bill Limiting Deductible Compensation
Issue: Executive/Deferred Compensation

Date: May 11, 2009

Action Taken: On May 7, the Senate Democrats’ second-in-command, Senator Richard Durbin (D-IL), introduced S.1007--the Excessive Pay Capped Deduction Act of 2009-- a bill that would impose a limit on the deductibility of compensation paid to any company employee. At the same time, he also introduced S.1006, a bill that would require a supermajority of publicly traded company shareholders to approve compensation payable to any company employees if that compensation package were to be in excess of the limit. The limit is 100 times the company’s average compensation.

Although passage is not imminent, because of Sen. Durbin’s stature in the U.S. Senate, S. 1006 and S.1007 convey a very strong “message” of where leaders of the Senate may wish to head in future tax legislative debates. The bills serve two purposes. First, they respond to public anger over perceived excessive bonuses paid to employees of some financial institutions. Second, S. 1007 could raise tax revenue to fund new programs.

Background: The Durbin legislation is intended to be comprehensive. It applies to all companies, regardless of their size or structure. It defines compensation as including wages, salary, fees, commissions, fringe benefits, deferred compensation, retirement contributions, options, bonuses, property and any other form of compensation identified by the Treasury Department. It includes part-time and partial year workers’ compensation (annualized) in the formula for calculating a company’s average compensation.

S.1007 also requires companies that are paying “excessive compensation” (amounts over the deductible limit) to report to Treasury. The report must include the amounts of compensation paid to the company’s lowest-paid and highest-paid workers, the company’s average compensation amount, and the number of workers who are being paid “excessive compensation.” The report must also include the amount of compensation being paid to those receiving “excessive compensation.” S.1007 would be effective after the date of enactment. The Senate Finance Committee has jurisdiction over the bill.

The Excessive Pay Shareholder Approval Act, S.1006, would require 60 percent of a publicly-traded company’s shareholders to approve any pay packages larger than 100 times the average compensation paid to the company’s workers. S.1006 is in the jurisdiction of the Senate’s Banking Committee.

Next Steps: The Durbin bills join the currently stalled legislative attempts to penalize “excessive” bonuses like those paid to AIG executives and the Finance Committee’s $1 million cap on deferred compensation. Tax insiders believe that when Congress turns its attention to tax legislation—whether because of the need to extend expiring tax provisions, or to address the problem of the scheduled expiration of the estate tax next year, or to raise revenue for healthcare reform—these executive and deferred compensation bills will be in the forefront of the debate. Timing is not yet clear, but most tax policy watchers on and off the Hill think tax legislation will start to develop sometime this summer.