Kevin Drum has an epiphany:
The good news is that Congress is set to pass a bill that prevents companies from funding lavish executive pension plans if the pension plan for their regular workers is underfunded and going bankrupt. ... But then there's this:
For decades, executives relied on the same pension plan as other company employees, so they had an incentive to make it generous. The shift toward a dual system started in 1994, when Congress passed a law intended to limit the cost to taxpayers of runaway executive pay. The law barred companies from taking a tax deduction on compensation in excess of $1 million a year for any current employee. The result: Companies began setting up supplemental pension plans that encouraged senior managers to defer compensation.
Well. That's certainly a good example of the law of unintended consequences, isn't it? I mean, I'm sure the $1 million cap seemed like a good idea at the time.
Here's a couple of other observations for Kevin to chew on. First, the 1994 tax change was effected not by some generic "Congress" but by Bill Clinton and the Congressional Democrats over GOP objections. Second, the Democrat tax change also was a major factor in the Enron, WorldCom, and other scandals of the tech bubble period.
In addition to leading to supplemental pension plans, because incentive-based pay didn't count against the $1 million cap, the Clinton/Democrat tax change encouraged companies to shift executive compensation from salaries into stock options. In turn, the shift towards stock options gave executives strong incentives to managethe stock price rather than the business. And, in some cases, to commit fraud so as to ensure that the company hit its forecasts.
