Picking on Perks

As GE reported to stockholders in March 1997, the company then agreed “to provide [Mr. Welch] with continued lifetime access to company facilities and services comparable to those which are currently made available to him.” As with virtually every big company, that includes access to services that may never be used. But simply listing them all has been the source of great amusement posing as outrage.

The Securities and Exchange Commission quickly promised to waste taxpayers’ money on this non‐​issue, since the SEC seems to regard itself as the enforcement arm of the press. The ease of getting the SEC to overreact to every press complaint undoubtedly gives populist reporters a heady sense of omnipotence.

When rehashing such old news, it helps to see what was said at the time. A March 23, 1997 article in The Washington Post began by noting, “If you had bought $100 worth of General Electric Co. stock when Jack Welch first became chairman of the company 16 years ago, your investment today would be worth $2,194.30 — nearly double the rise in the Dow Jones industrial average.” Little wonder stockholders never complained about how much Jack Welch was paid. Mr. Welch turned GE into the most valuable company the world had ever seen, though Bill Gates sometimes gave him a run for that title.

How executives are paid for adding billions of dollars to stockholders wealth is strictly the stockholders’ business, not that of pundits or politicians. Stockholders may or may not want more detailed information about retirement packages than is currently required, but proposing to change such rules does not justify retrospective nitpicking over one particular old agreement. One reporter even feigned indignation that Mr. Welch might earn $17,000 a day for consulting. Would Bill Clinton provide an informal chat for that little?

On Oct. 13, 1996, the New York Times had some remarkably prescient comments on the timing of executive pay:

The 1993 tax law pushed the top tax rate to 39.6 percent from 31 percent and banned corporations from deducting any salary above $1 million. You can’t even get a mediocre baseball player for a million these days or hire a television news anchor to complain about executive pay. So one “unintended consequence” of the Clinton administration’s arrogant salary cap was that the pay packages offered to top executives tilted toward stock options. Another “unintended consequence” was to encourage executives to defer some pay until retirement.

In 1996, Mr. Welch says he turned down a “one‐​time payment of tens of millions of dollars” to stay on until 2001. There is no reason to doubt it. He was and is one of the greatest superstars among CEOs, and he was and is worth a lot of dough to GE shareholders like me. Political efforts to overtax executive salaries at both the individual and corporate level had made it attractive for both Mr. Welch and GE to defer some compensation until after retirement. And earlier efforts to limit contributions to 401(k) plans had tilted the form of deferred compensation toward in‐​kind perks.

Jack Welch recently gave up many perks and agreed to pay at least $2 million a year for others (e.g., company planes and cars are essential security for someone so famous). Much of his 1996 compensation package ended up just being lost rather than deferred, but that loss will now be shared by his former wife.

The common post‐​1993 practice of trading smaller salaries for stock options and deferred perks would never have happened if the top tax rate had not been increased by nearly 28 percent in 1993, and if companies had not been precluded from deducting salaries above $1 million. Without those penalties, executives would have much preferred fatter salaries and gladly paid reasonable taxes on them.

Foolish tax policies always produce “unintended consequences.” This is just one more illustration of why I have long argued that an excellent first step toward a semi‐​sensible tax policy is to repeal the entire 1993 tax law.