The $1 million deductibility cap unexpectedly inflated executive pay via options.

Evidence

In the early years of the Clinton administration, changes in corporate tax policies aimed at reining in executive compensation limited the deductibility of executive salaries over $1 million unless the additional pay was linked to performance (Davis & Thompson 1994). The ironic consequence was that executive pay, now linked to stock market measures of performance, subsequently skyrocketed. — Gerald F. Davis & Suntae Kim, Financialization of the Economy, 55

Categorization

• XREF: A classic unintended-consequence case echoing the broader financialization literature on how policies meant to curb pay backfired. — connects to: Agency theory, not financial economics, legitimized executive stock-option compensation — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1174; Stock-based executive pay widened CEO-worker income gaps. — Gerald F. Davis & Suntae Kim, Financialization of the Economy, 56; Financial earnings at nonfinance firms raise executive bargaining power with boards. — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 56
• SEED: Could anchor an essay on how well-intentioned regulation routinely produces the opposite of its stated goal, with executive pay reform as the case study.

Related

• Agency theory, not financial economics, legitimized executive stock-option compensation (similarity 0.82)

Broader Connections

• Stock-based executive pay widened CEO-worker income gaps. #expands (0.75) — Gerald F. Davis & Suntae Kim, Financialization of the Economy, 56
• Agency theory, not financial economics, legitimized executive stock-option compensation #complicates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1174
• Financial earnings at nonfinance firms raise executive bargaining power with boards. #corroborates (0.72) — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 56