Most people are now aware of the new laws aimed at curbing executive compensation by limiting the amount of money that can be put into their deferred compensation plan to $1 million (the rest incurring a 20% penalty). Democrats hail this as a final victory over a tax loophole that has allowed many executives to channel millions through a tax-free venue - which is true. The problem is that there are additional loopholes that these new regulations fail to address - loopholes that will be exploited by future executives. Consequently, these new regulations might end up hurting middle management and others while executives are free to get their money in other ways.
The main problem in corporate America is the power that most executives have over their own compensation. Ironically, in a market where shareholders are supposed to elect members of the Board to oversee management, CEO's serve as chairmans' of their own board in over 50% of all companies! This enables them to set their own pay in many cases, as management compensation is something that the board sets. Now, the problem lies in the fact that while these new regulations may limit the amount of money put into a deferred compensation account, they do not impose other limits on compensation. Therefore, executives can simply re-channel the money from these accounts to stock options, restricted stock grants, or a multitude of other venues. Meanwhile, middle management - who has very little control over their compensation - may end up paying more as a result.
Regulators made a similar mistake back in 1993, when they imposed a $1 million limit on tax-deductible CEO salary that wasn't tied to performance. This ended up being on of the major factors leading up to the explosion in the number of stock options granted to executives - a practice that was not as common before the regulations originally went into effect. In the end, the middle class ended up with a tax hike while executives ended up with more stock options. The laws we are seeing drafted today may turn out to be the same thing. Perhaps the old saying is true: history repeats itself.