Letter sent to Financial Times

Sir, Louis Hindery ("Obama must act to curb executive greed", June 25, 2009) suggests, "Congress should establish for all public companies, a ceiling on individual executive compensation as a reasonable multiple of average employee compensation..." This sounds un-American and unconstitutional. Two simple measures would burst the compensation bubble.

First, the IRS needs to withdraw the provision in the tax code that allows companies to deduct the discount at which they issue stock to employees. For years, companies have maintained that stock-based compensation was not an expense, but they have eagerly taken a huge tax deduction on that account in their tax returns.

Second, cash spent on buying back shares that were issued to employees in lieu of cash compensation should be reported in the operating section of the cash flow statement. If the IRS wants to grant companies a compensation deduction, then base it on these cash outflows. Cash outflows relating to stock repurchases should only be reported as a financing activity, i.e., an allocation of capital, once it has been shown that all dilution caused by stock-based compensation has been mopped up. Executives would have us believe that the stock-based compensation expense, as recognized in the income statement, is a non-cash expense. Cash spent on stock repurchases to combat dilution caused by stock-based compensation betrays this notion, and if properly disclosed as suggested above, would better inform shareholders of the true cost of share-based compensation.

Looking to Congress for a solution is a waste of time. Congress has been the corporate boardroom’s best ally in the long fight against any efforts to shed light on stock-based compensation expensing and other related disclosures.