Executive Compensation and Tax Policy : Lessons for Canada from the Experience of the United States in the 1990s

Until now the legal and regulatory measures that have been taken in the United States and Canada to combat excessive executive compensation have been largely ineffectual. The one possible exception is the tax deductibility cap of ý162(m) of the US Internal Revenue Code, which was introduced in 1993. A similar but improved provision ought to be considered by Canadian policymakers. There are several lessons Canadian policymakers can take from the US experience with ý162(m). First, policymakers should consider tightening, although not eliminating, the performance-based exemption. Second, policymakers should not anticipate a deductibility cap to raise a considerable amount of tax revenue or totally prevent CEOs from engaging in rent-seeking behaviour. Third, policymakers should strongly consider prohibiting executives from unravelling the incentives associated with performance-based compensation by entering into hedging transactions. Finally, Canadian policymakers would be wise to carefully consider the effects a deductibility cap would have on the competitive international environment in which Canada competes for corporate patronage