The Small Business and Work Opportunity Act of 2007, “Severance” Pay, and President Bush on CEO Pay

Editor’s Note: This post is by Broc Romanek of

On February 1st, the Senate overwhelmingly approved the Small Business and Work Opportunity Act of 2007. Sections 206 (pg. 79) and 214 (pg. 98) include amendments to the Internal Revenue Code that would significantly curtail any employee’s ability to defer compensation in excess of $1 million per year under Section 409A.  In addition, the Act would broaden the definition of “covered employee” under Section 162(m) so as to apply the $1 million deduction limitation to payments made to a “covered employee” even after such individual ceases to serve in that capacity.  Note the elimination of the reference to the SEC’s disclosure rules in the 162(m) definition of “covered persons.”

Yesterday’s WSJ included this negative opinion of the bill.  I agree that Congress should not try to regulate executive compensation through the tax code, as boards can evade the law with tax gross-ups and other employees may be unfairly penalized. Of course, Congress shouldn’t be blamed for excessive executive compensation as the op-ed intimates; that blame should fall on the shoulders of directors.

The Senate and the House now have to reconcile this Senate bill with a much simpler House version. Here are more documents related to the Act:

Staff Summary
Revised Joint Committee Summary
Revised Joint Commitee Revenue Estimate

Here We Go Again: Caremark’s Severance for Those Not Terminated

I easily could blog on executive compensation every day. I really don’t want to and I don’t think you want me to either. But it’s hard not to, particularly with boards continuing to prove that they are either aloof or indifferent as to what their shareholders want. Take Caremark as the latest example. As yesterday’s Washington Post column from Steve Pearlstein outlines (as well as this press release), many of Caremark’s executives will receive hefty change-of-control payments when CVS completes its acquisition of Caremark – even though those executives also will receive handsome employment agreements with the merged company! No pay practice infuriates shareholders more than this one.

A lawsuit related to this merger has been filed in Delaware’s Chancery Court, with Chancellor Chandler getting another whack at these types of egregious compensatory arrangements (you may recall that Chancellor Chandler is the one who sent the Disney case to trial). With boards like Caremark, I don’t blame Congress for “getting into the game” and trying to rein in existing practices, even though the end result will likely cause unintended consequences.

President Bush on Rethinking Pay Practices

And confirming that CEO pay truly is a hot political topic, President Bush called on Wall Street to rethink pay practices in a speech yesterday. Here is an excerpt from today’s related NY Times article:

“White House officials said that Mr. Bush decided to raise the issue out of his own sense of outrage over deals in which executives have left flagging or failed companies with huge compensation packages, as workers and lower-level executives have been left far behind.

But officials said there was also an economic concern: that distrust of corporate executives over their pay had the potential to scare individual investors out of the market.”

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  1. Patricia Lacey
    Posted Thursday, May 1, 2008 at 10:20 am | Permalink

    the sixfold increase in American CEO pay from 1980 to 2003 is almost wholly explained by the roughly sixfold increase in market capitalization of big U.S. companies over the same period. (Asset values have increased sixfold because both corporate earnings and the price-to-earnings ratio investors are willing to tolerate have increased by factors of 2.5.) The trend lines of market capitalization and executive payouts rose and dipped in near-perfect tandem.

  2. Mary Skyers
    Posted Thursday, May 1, 2008 at 10:21 am | Permalink

    Americans may be used to the rich getting richer, but the issue of CEO compensation never fails to set them fuming, especially in the post-Enron era. Since 1980, executive pay at big corporations has increased more than sixfold.

  3. Paul Brown
    Posted Thursday, May 1, 2008 at 10:23 am | Permalink

    the talent differences among CEOs are generally minor. For example, if a given firm substituted the most talented CEO for the 250th most talented CEO, its market capitalization would only increase by 0.016 percent. But for a $500 billion company like ExxonMobil, 0.016 percent is equivalent to some $80 million. In other words, as companies get bigger, a talented CEO can have a greater impact.

  4. John Bushelle
    Posted Thursday, May 1, 2008 at 10:25 am | Permalink

    large companies bid up prices across the board for the small number of men and women deemed capable of managing them. The reason CEO pay in other countries (such as Germany) tends to be lower is that the “big” companies abroad are generally smaller than the big companies in America. We do not yet have a global market for CEO talent.

  5. Jamie Phillips
    Posted Monday, January 18, 2010 at 12:25 pm | Permalink

    It’s amazing that after two years and the bailout nothing has changed!! It is so frustrating.