Employee compensation was a business expense. If I get a $2000 a year raise then my employer gets to deduct my compensation--including the increase--from "his" income. It's a business expense, after all. Never really considered that any raise I got would be viewed as "subsidized." Then again, I still don't assume that monies not payed to the federal government are somehow monies "expensed" by the federal government back to me. (Although that would be a nifty ray to raise the velocity of money, at least on paper. I make $1000, it's viewed as immediately becoming federal property and thus changing hands; then $900 of it is paid back to me as 'decollected potential federal revenue')
Then, a while back, it was decided that to make things "fair" and stop the increase in CEO/mgt. compensation only the first million dollars would be deductible. Congress passed the law, the president signed it. But an exception was left in for "performance pay". Money tied to specific performance goals. The employee would still pay taxes on it; but the business could deduct the expense. This was viewed as a kind of stick: It would give companies an incentive not to let CEO compensation increase.
An NEBER lit review said this didn't happen. It had no effect. People didn't do as they were "coaxed" and "cajoled" into doing. Funny, that. Instead most businesses just made everything over $1 million "performance pay." That looked bad. So most of the "income" came to be deferred, which meant it wasn't potentially deductible and didn't need to be performance pay. Stock options, for instance. Stock options weren't listed on the books as an expense. This was another way of avoiding taxes, by all concerned. People don't like having the government on their backs. Any of us. We do like it when government does good stuff for us, though.
Deferred compensation was a financial liability and that was an accounting issue. Well, we didn't like that--and investors didn't because such details were relegated to the footnotes of long reports nobody ready anyway--and we could use that to achieve our goal of slowing CEO compensation. This was a bit less explicit. The people involved didn't like it, it was another millstone around their necks.
So now stock options are expensed by the company in the year that they are awarded to the employee, at some reasonable market rate. However since they're expensed, they're deductible in the current year if they're performance pay. That requires a bit of rigamarole, but it's cheaper than paying the taxes.
People want a goal but it's unclear that the government has the authority or the moral right to impose clear and binding salary caps on private citizens outside of a national emergency. Rather than manipulating people into deficit outrage for the purpose of trying to manipulate businesses through the tax code by removing the deduction, let's just be honest about wanting control and authority over them. "We want to punish corporations, in this case by punishing any that give out raises we think are excessive without first receiving public approval."
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