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One of the great unintended consequences of past tax policies…

by | Jun 15, 2010 | Articles

One of the great unintended consequences of past tax policies has been the focus on current thinking in business which I like to call “Apres moi le deluge” mentality.  In a Wall Street Journal Article concerning Goldman Sachs there was this discussion about how through the 1970s Goldman Sachs was known for caring about the industry and the survival of the markets but sometime in the 1980s that mentality changed and now there is only a “what can I receive now” attitude.  It struck me that the big change in the 1980s was the Reagon tax acts which effectively brought taxes down from a high of 70% to a low of 28%.  When tax rates were at 70% many executives deferred a great deal of their salaries and bonuses to reduce the percentage paid out in taxes.  In order to defer the tax, the deferred salary and/or bonus had to be a general debt of the employer.  The upshot of the practice was that the survival of the corporation was needed in order for executives to be paid.  So executives were concerned about the company’s survival as they paid into the deferral system.

The huge reductions in tax rates that came with the Reagan revolution prompted executives to react as could be projected.  They decided to receive their payments as soon as possible.  No longer did executives care about the next quarter, their focus was on the nearest quarter that would give them a bonus.  Bonuses were received in cash and most deferral methods were abandoned.  The unintended consequence was that executives began to look at annual performance rather than multiyear performance and the “Apres mois le deluge” mentality entered corporate America where it has resided ever since.  The best method to ensure corporations are managed for the future, if we think that is important, is to devise executive pay that rewards executives for thinking about the long-term health of the company and punishes them when the company implodes.  Had the executives at Fannie Mae, Feddie Mac, Lehman Brothers, Bear Stearns and others had their bonuses tied up for years with the company they ruined, do you think they would have taken the same risks?  I think not.

The American entrepreneur has thrived and succeeded based on individualism in capitalist America.  Individual competitive behavior within and amongst teams inside a corporation has been believed to advance the progress and foster the growth of revenues of a company.  It has thus so far been rewarded accordingly and aggressively in the form of an annual bonus.  However, developments in the markets in the last couple of years have made executives, regulators, and other senior players in corporate America question the effectiveness and the repercussions of the model.  Should really remuneration be purely focused on individual performance?  Isn’t the performance of the collective more important and doesn’t it present a more sustainable model in the long-term?  Many investment banks as well as fund managers are beginning to embrace this collective remuneration model while shifting their focus from ‘keeping the best’, and thus securing aggressive short-term profits, to the actual long-term earnings of the company.  As times change, and moods change, we shift our thinking and corporate existence to a what would be firmly dismissed and labeled as too leftist and anti-capitalist only a few years back.  However, is it really too leftist or perhaps a brave attempt to find sustainability in a competitive economic model?  Who’s to say that once this economy turns around in ten, fifteen years and anxieties subside, high risk taking, tolerance and reward won’t return as the norm?  Do societies really change or is it simply human nature to strive for ‘more’ and to ignore the ‘simply sufficient’ as not enough.  That might be more of a socio-philosophical question that each of us can and should ponder on.

 

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