THE BLOG
03/24/2014 03:41 pm ET | Updated May 24, 2014

A Conservative Executive Pay Plan

Add House Republican tax leader Rep. Dave Camp (R-Mich) to those calling for sanity in executive pay scales.

On February 26 the chairman of the House Ways and Means Committee introduced a major overhaul of the tax code. One provision of his comprehensive package eliminates deductions for what he calls "excessive employee remuneration."

Specifically, Chair Camp's measure eliminates the loophole that companies have used to deduct pay beyond $1 million for the five senior officers as a business expense. In 1993, Congress approved as principle that pay beyond $1 million can't be deducted; but it provided for a performance test escape clause. The Camp bill closes that loophole.

In the Camp discussion draft, the overview of the provision says that the shift to performance pay "has led to perverse consequences as some executives focus on -- and could, in rare cases, manipulate -- quarterly results."

In an era when income inequality is most manifest by staggering pay at the top, a Republican appeal for reform is refreshing. Even as the GOP tax leader unveiled his ideas, the board of JP Morgan Chase awarded $20 million, a 74 percent compensation increase, to CEO Jamie Dimon. Two months before, the bank paid a $13 billion fine, the biggest single penalty in corporate history for lending fraud. This fine followed numerous other penalties levied against the mega-bank in the last half-decade.

At McKesson Corp., the firm paid CEO John Hammergren $51.7 million in compensation in 2013, which comes with $114 million in pension benefits. McKesson acknowledged it "customized" performance criteria to qualify Hammergren for this largess.

Other cases of exorbitant pay abound.

Camp is not alone among conservatives questioning outsized pay.

Polls consistently show Americans do not like high executive pay. In a February 2014 poll, a majority of Americans from across the political spectrum agreed that executives' pay is too high -- 79 percent of Democrats, 61 percent of independents and 58 percent of Republicans. A year after the onset of the financial crisis, a Gallup poll found a substantial majority of Americans favored government action to curb all excessive pay.

During the bank bailout, the government's plan to pay bankers at failed AIG $1.2 billion in bonuses drew scorn from Senate Minority Leader Mitch McConnell (R-Ky), Sen. Richard Shelby (R-Ala.), Sen. Chuck Grassley (R-Ia.) and other conservatives. AIG bankers obviously did not deserve such bonuses.

By any measure, senior executive pay has grown. The percentage of corporate profits spent on senior executive pay has doubled from 5 percent in 1990 to 10 percent in 2010. American managers built important technology and pharmaceutical companies in the last century, when the multiple of CEO-to-average pay stood at 42 in 1980. By 2012, this multiple reached 354.

The Camp proposal joins companion bills introduced in the Senate by Rep. Jack Reed (D-R.I.) and House by Rep. Lloyd Doggett (D-Texas). These bills cover all employees at public companies paid more than $1 million. Sen. Tim Johnson (D-S.D.), chairman of the Senate Banking Committee, counts among the bill's co-sponsors. Congress' Joint Committee on Taxation estimates the measure will raise $50 billion over 10 years. The Camp measure raises $12.1 billion over the same period.

Tax changes are one remedy among several current initiatives to bridle runaway executive pay. A relatively new law permits shareholders to register a "say on pay." A Roosevelt Institute report found such votes have led to substantive reforms. For example, McKesson shareholders voted by a 3-1 margin last year to protest Hammergren's pay. Following this vote, McKesson's board actually trimmed the pension benefit by $45 million along with his annual compensation.

Another new rule now being implemented requires companies to publish the CEO's pay as multiple of the median-paid employee. That may introduce a form of unit pricing, allowing investors to shop for the "best value" in a CEO.

To combat insular boards responsible for awarding excessive pay, another rule awaiting implementation provides for independent shareholders with combined 3 percent of the shares to nominate a director.

Oddsmakers give Camp's plan little hope of enactment this year, largely because partisan rancor spells doom for nearly all bills.

But in the end, stronger laws will be required to staunch the looting of American corporations by senior executives. Chair Camp's laudable tax measure constitutes an important expression that conservatives are willing to help, and we hope the Camp-Reed-Doggett effort sees success.