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Law and tax: options dating

Chicago Law faculty finds a link between executive compensation,
performance, governance and tax law.

The purported goal of section 162(m) of the IRC (the provision
that limits deductibility) was to reduce total amounts of
executive compensation.

The problem cases involve the managers deceiving the board,
not the company deceiving the government.

The law also required disclosure of the exact amounts
and form of pay. One reason often cited for this is that
executives at rival firms now knew what others were
making. The Lake Woebegone effect then kicked in, as
all CEOs wanted to be paid more than average, and no
firm wanted to be considered paying below average.
The one-way ratchet here is obvious.

Because cash levels were now capped (for tax purposes),
firms had every reason to pay more with non-cash, either
perks or equity. Since performance-based pay (e.g., options)
was specifically exempted, firms could be expected to pay
more of this. The problem is, of course, that the use of
options doesn't make sense in all cases or at levels necessary
to attract and reward talent, especially given the heterogeneous
preferences and wealth profiles of potential candidates.
The law thus chose one form of compensation over another
per se, without recognizing that this choice – the pay mix of
cash and non-cash -- is something that cannot be made at
a general level. It should be/needs to be a firm choice, not
a government choice.

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