Posted: August 31, 2021
While former President Donald Trump is no longer in the White House, his impact on the American way of life remains in many ways, especially regarding his administration's influence on corporate law in the United States. In regard to executive compensation specifically, one piece of Trump-era legislation is reshaping the way that America’s top executives are being paid - the Tax Cuts & Jobs Act of 2017. Let's take a look at how this act has influenced American business, and specifically, how it helps Executive Compensation Consultants maximize executive pay for CEOs and other corporate executives. What is the Tax Cuts & Jobs Act? If you’re not familiar with the implications of the Tax Cuts & Jobs Act that former President Trump signed into law in 2017, the main takeaway is really quite simple. Essentially, this law's main focus made it easier for individuals to file taxes by increasing the size of the standard deduction that they can claim. The TCJA nearly doubled the standard deduction for individual filers from $6,500 to $12,000 and from $13,000 to $24,000 for joint filers. This provided more incentive for people to stick with the standard deduction as opposed to trying to itemize their deductions. By creating this incentive, the TCJA simplifies the process of paying taxes for millions of Americans. This translates into fewer hours wasted trying to navigate the complicated tax process. While these changes were mostly for individuals, there were also some implications for corporations. Let’s take a look at how these changes have been utilized by different companies to pay their executives more. How the TCJA Impacts Executive Compensation In addition to the far reaching changes to the standard deduction amount for individuals, the TCJA included one very subtle clause specifically for businesses and corporations that was instantly noticed by tax professionals. This clause states that taxes on profits for businesses are taxed at a dramatically lower rate than taxes on salaries or other wages. Since many top-level executives are also business owners who share in the profits of their corporation, this means that a small tweak in how they classify their income could save them tens or hundreds of thousands (if not millions) in taxes - greatly reducing their tax liability and consequently increasing their total executive compensation. Currently, wages are taxed at a top rate of 37% plus 3.8% a Medicare tax. On the other hand, business profits are taxed at a top rate of 29.6% with no Medicare tax. By reducing their salary and taking a larger share of company profits, executives can shelter large amounts of money from tax liability without effectively reducing their take home compensation. On the contrary, this strategy can essentially increase a given executive's total pay in a given year. There are quite a few examples in corporate America of executives whose salaries have suddenly dropped after the new tax code was introduced. While it’s impossible to say for certain, it’s a safe assumption that these executives are taking advantage of the new loophole in the tax code. Here are a few changes in executive compensation from 2017-2018: - WeatherTech Floor Mats - CEO David MacNeil fell from $68 million to $47 million. - MidFirst Bank - CEO Jeffrey Records salary fell from $8.6 million to $1.8 million. - Uline - Dick Uihlein salary fell from $5.1 million to $2.1 million To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at email@example.com or by phone at 415-618-6060.