Letter to Treasury Secretary Tim Geithner
Kerry Presses Secretary Geithner to Support Legislation Limiting Salaries for Executives
Senator John Kerry (D - Mass.), a senior member of the Finance Committee, and author of the Compensation Fairness Act of 2008, today wrote to Treasury Secretary Tim Geithner, applauding the administration's plan to limit executive compensation for companies receiving significant funding from the Trouble Asset Relief Program (TARP) and pressing for support his legislation to tighten the rules for the amount of compensation that is deductible as an ordinary and necessary business expense.
"I share your concerns about executive compensation and believe that if it is left unchecked it will continue to result in executives taking unnecessary risks and remaining focused on short-term profits rather than long-term sustainability," wrote Sen. Kerry in today's letter to the Treasury Secretary.
Full text of the letter is below:
Dear Secretary Geithner:
I'm encouraged by your announcement today limiting executive compensation for executives of corporations that are receiving substantial assistance from the Trouble Asset Relief Program (TARP). As you know during the negotiations on the Emergency Economic Stabilization Act of 2008, Republicans blocked our efforts to limit executive compensation. However, the Act included provisions to limit the amount of compensation that can be deducted. I believe that we must act now to send an even stronger signal and demonstrate that we demand responsibility -- taking it one step further and limiting the deductibility of compensation for all executives. I have introduced legislation on this issue and would like to ask for the Administration's backing in getting it passed into law.
Last year, I introduced the Compensation Fairness Act of 2008 which tightens the rules for the amount of compensation that is deductible as an ordinary and necessary business expense. According to Equilar, a compensation research firm, the CEOs of the ten largest financial services firms in a survey of 200 companies with revenues of at least $6.5 billion were awarded a combined total of $320 million last year, even though the firms reported mortgage-related losses that totaled $55 billion and that wiped out more than $200 billion in shareholder value. That is unacceptable. It is not just the financial industry where executive pay has become excessive. For 2006, the CEOs of large U.S. companies averaged $10.8 million in total compensation, more than 364 times the pay of the average U.S. worker. We can learn from what led us to the current situation and one way to make CEOs more accountable is to limit the taxpayer subsidy for executive compensation.
Under current law, the allowable deduction for the compensation of the top five highly paid individuals, including the CEO and the chief financial officer (CFO) is limited to $1 million per year. This limitation does not include commissions and performance-based pay. I am concerned that these exceptions have weakened the effectiveness of the limitation and encourage performance-based pay arrangements which may lead executives to manipulate earnings.
The Compensation Fairness Act of 2008 would make several changes to the limitation on deduction for compensation. It would repeal the exceptions for commission and performance-based pay. Under current law, an employee that is covered by the limitation has to be employee the last day of the year. The legislation would change this to make a covered employee one who is employed at any time during the year. This legislation would retain the $1 million limitation and index it for inflation.
I am currently working on a revised version of this legislation which also limits the amount of nonqualified deferred compensation that can be deducted. I appreciate your interest in this issue and believe that we should look at executive compensation beyond TARP participants.
My legislation does not limit the amount of salary an executive can receive, but it would limit the tax subsidy. Taxpayers should not have to bear the cost of excessive compensation. Warren Buffett, one of the most successful businessmen of all time, has annual salary of $100,000.
I would appreciate if you would review my proposal and consider including it in the budget for fiscal year 2010. Enclosed is a copy of a draft of the legislation for your review. Thank you in advance for your consideration.
John F. Kerry
cc: The Honorable Peter Orszag