1

Revenue Consequences of 162(m)

Congress enacted section 162(m) in the Internal Revenue Code as part of the Omnibus Budget Reconciliation 

Act of 1993, P.L. 103-66. This legislation capped a public company’s corporate income tax deduction at $1 

million per year for amounts paid to each of its top five executives. This $1 million limit includes income from 

salary, bonuses, stock grants, and other compensation, but it does not include income that relates to performance 

pay such as a non-equity incentive plan, stock options, stock appreciation rights, pensions, and deferred 

compensation (if deferred until after retirement).1The purpose of the law was to rein in executive pay by 

imposing a higher effective tax rate on salaries above the $1 million threshold. In effect, this limit imposed over 

a 60% federal surtax on salaries above $1 million. In order for an executive to receive an additional dollar above 

the cap in take home pay, the firm would have to generate an additional $2.56 in revenue because of corporate 

and incomes taxes. Given this high tax, few expected anyone to exceed it as executives and firm compensation 

committees have a strong incentive to ensure that payments plans avoid this penalty for the fiduciary interest of 

their shareholders. ACA and other policies further promoted this policy with an even lower limit of $500,000.

This is the first analysis using taxpayer data to explore this phenomenon nearly twenty-five years since the 

enactment of this policy. Surprisingly, some firms pay salaries in excess of this limit. If taxed at the highest rate, 

this provision netted $1.1 billion in 2013. This is orders of magnitude larger than the Joint Committee on 

Taxation’s estimate of $67 million a year in 1993.

2

 Based on current trends, this figure will likely continue to 

increase, driven largely by more firms willing to pay salaries above the limit. The increasing degree to which

firms exceeds the cap raises questions about the ability of compensation committees to operate in the fiduciary 

interest of their shareholders. If compensation committees acted in the best interest of their shareholders then 

the Treasury would not potentially be receiving billions in tax revenue from this provision. The findings here 

suggest a costly mistake or a very expensive guarantee cost; regardless, both are troubling to shareholders as

more than 25% of publically traded corporations exceeded the limit in 2013.

Researchers found that total executive pay decisions have been relatively insulated from this policy intervention 

(Rose & Wolfram 2002; Ferris & Wallace 2009). 3Speaking anonymously to BusinessWeek for fear of losing 

their positions, members of compensation committees for four of the nation's largest corporations said that 

162(m) is merely a nuisance that has not stopped them from paying executives whatever they consider fair.4

Frydman and Saks (2010) estimated that the average three highest paid executives at top firms received total 

pay packages of $7.63 million from 2000 to 2005 with the average CEO receiving $9.20 million. Those 

executives in the top ten percent of companies received packages averaging $16.9 million.5This policy has

though, unintentionally, established $1 million as the de facto executive salary. Evidence suggest that firms 

paying base salaries in excess of $1 million lowered salaries to $1 million (Perry and Zenner 2001) and other 

 

1 Balsam, S. “Taxes and Executive Compensation.” Economic Policy Institute (August 14, 2012), http://www.epi.org/publication/taxesexecutive-compensation/.

2 “Estimated Budget Effects of the Revenue Provisions of H.R. 2264 (The Omnibus Budget Reconciliation Act of 1993)” Joint Committee on 

Taxation (August 4, 1993), http://www.jct.gov/x-11-93.pdf.

3 Rose, N. and Wolfram, C. “Regulating Executive Pay: Using the Tax Code to Influence Chief Executive Officer Compensation.” Journal of 

Labor Economics Vol. 20 No S2 April 2002): S138-S175. Ferris, K. and Wallace, J. “IRC Section 162(m) and the law of Unintended 

Consequences.” Advances in Accounting Vol 25, Is 2 (December 2009): 147-155.

4 Epstein, Keith and Javers, Eamon. “How Bill Clinton Helped Boost CEO Pay.” Bloomberg (November 27, 2006) 

http://www.bloomberg.com/news/articles/2006-11-26/how-bill-clinton-helped-boost-ceo-pay

5 Frydman, Carola, and Raven E. Saks. "Executive compensation: A new view from a long-term perspective, 1936–2005." Review of Financial 

Studies (2010).
2

firms raised salaries below $1 million to exactly $1 million (Rose and Wolfram 2002).6 Many firms also 

modified bonus plans by replacing discretionary plans with overly generous formulas (Murphy and Oyer 2005; 

Balsam & Ryan 2007). This transition usually takes place after hiring new executives as it presents a better 

opportunity to redesign the executive pay package (Balsam & Ryan 2007).7Thus, most executive pay comes 

from performance pay, but as mentioned, performance pay can essentially be structured as a guarantee. This 

analysis adds to the literature because it explores the phenomenon of firms exceeding the deduction limit.

This analysis looked at nine years of corporate tax returns filled between 2005 and 2013 for publicly traded 

firms. The data in this analysis comes from the Internal Revenue Service (IRS) Statistics of Income division's 

(SOI) Corporation file. Every year, SOI randomly samples corporate income tax returns (Form 1120), edits 

numerous variables for consistency and accuracy, and uses them to publish aggregate statistics. Although this 

tax provision went into effect in 1993, this analysis begins in 2005 because changes in reporting requirements 

created a vehicle to see which firms exceeded the limit and by how much. Corporations now have to report on 

Schedule M-3 the total compensation that feel under the 162(m) provision for the top five executive officers. 8

This broke out for the first time the total deductible and nondeductible compensation for these executives. This 

analysis dropped any firm not publically traded or that did not exceed the limit. Because of data unavailability, 

the analysis cannot occur for years before 2005.

Total nondeductible executive compensation has been steadily increasing as more firms exceeded the limit as 

seen in Figure 1. Between 2005 and 2013, publically traded corporations paid top executives over $22.5 billion 

in non-deductible compensation, as seen in Table 1. This analysis weighted all the figures in Table 1 to mimic 

the population. The second column lists the number of corporations that exceeded the limit in that year. For 

publically traded corporations, 27% of all firms exceeded the limit in 2013. Perhaps firm accidently exceeded 

the limit one year but corrected it afterward. The data, however, does not indicate this correction. Of the firms 

exceeding the limit at some point, 75% of firms exceeded the limit for more than one year. For these firms, 18% 

exceeded it every year that they were in this analysis. The third column list the average amount firms exceeded 

this limit. If a firm had taxable income, column four lists the average percent of their taxable income that they 

forwent because they exceeded the deduction. The last column then list total nondeductible compensation by all 

the firms in this analysis. 

During this period, the total compensation exceeding this limit increased from $2 billion to $3 billion and the 

number of firms exceeding the limit increased by 63% from 725 to 1,185. Yet the average amount that a firm 

exceeded the limit and the percent of taxable income forgone have been stagnant. Thus, driving this growth then 

has been the willingness of more firms to ignore this deduction limit. If taxed at the highest corporate tax 

bracket of 35%, then this provision, at most, raised $1.1 billion in 2013 and $7.9 billion cumulatively between 

2005 and 2013. Most of the firms exceeding the limit are some of the largest corporate firms as defined by 

having at least a billion dollars in asset size. Asset size is determined by adding together gross receipts, total 

dividends, gross rents, interest, gross royalties, absolute capital gain net income, and absolute net gain or (loss).

The industries with the most firms exceeding the limit did not change significantly between 2005 and 2013. The 

top five industries include Service, Metal and Machinery Manufacturing, Wholesale and Retail Trade, 

 

6 Perry, T. and Zenner, M. “Pay For Performance? Government Regulation and the Structure of Compensation Contracts.” Journal for 

Financial Economics vol. 62, issue 3 (December 2001): 453-488.

7 Balsam, S. & Ryan, D. “Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m).” Journal of 

Accounting, Auditing, & Finance vol. 22 no. 4 (October 2007). Oyer, P. and Schaefer, S. “Why Do Some Firms Give Stock Options to all 

Employees?: An Empirical Examination of Alternative Theories.” Journal of Financial Economics vol 76, iss. 1 (April 2005): 99-112.

8 Boynton, C., DeFilippes, C. and Legel, E. “A First Look at 2005 Schedule M-3 Corporate Reporting.” Tax Notes (November 3, 2008) 

http://www.irs.gov/pub/irs-utl/schm-32005firstlookboynton-defilippes-legel11_03_08.pdf.
3

Information, and Finance & Management of Companies as seen in Table 2. These five industries consistently 

accounted for 61% of firms exceeding the limit and 45% of the total nondeductible executive compensation.

As part of the Troubled Asset Relief Program (TARP) legislation in 2008, Congress created a lower deduction 

limit at $500,000 with no performance pay exemptions for any entity receiving TARP funds. Congress also 

enacted similar requirements for any health insurer beginning in 2013 as part of the Patient Protection and 

Affordable Care Act (ACA). These new restrictions appear to have been ineffective in reducing executive 

compensation. Most firms quickly repaid the TARP funds. Therefore, the TARP specific limits did not apply to 

them.

9

The number of firms classified as in the Insurance Carriers and Related Activities Industry category, 

which includes Health Insurers, exceeding the limit actually increased from 15 to 22 from 2011 to 2013, 

although this is still less than the high of 32 in 2009. While these few firms seem to be exceeding the limit to a 

greater degree because of the lower threshold established in the ACA, they only represents 1% of the total 

amount of non-deductible compensation that firms have forgone.

Over time, more firms have exceeded the limit on executive compensation, no doubt in part because the $1 

million threshold has not been adjusted for nominal (inflation) or real growth. If adjusted for inflation, the 

threshold in 2013 dollar’s would be $1.8 million.10 But this is only part of the reason, since simply adjusting 

the original Joint Committee on Taxation estimate for inflation explains only about a tenth of the growth in the 

estimate between the mid-1990s and 2013. Driving this growth then has been the apparent increasing number 

of firms willing to exceed the cap, even adjusting for inflation. Based on this trend, the tax revenue collected 

from firms willing to forgo this deduction will likely continue to increase. 

The findings here raise questions about firms mistakenly exceeding this limit and paying high taxes because of 

it or their willingness to pay high taxes for compensation guarantees even though firms can already essentially 

guarantee performance pay packages. Using taxpayer data for the first time, these findings raise an important 

concern regarding the ability of executive compensation committees to act in the fiduciary interest of their 

clients. This analysis found that between 2005 and 2013, public corporations paid top executives in excess of 

$22.5 billion in nondeductible compensation. Furthermore, more than 25% of all publically traded corporations 

exceeded the limit between 2005 and 2013 with 75% of those exceeding it doing so for multiple years. Given 

these findings, shareholders need to ask if these pay packages are worth their high cost.

 

9 “TARP Tracker from November 2008 to February 2016.” U.S. Department of the Treasury. https://www.treasury.gov/initiatives/financialstability/reports/Pages/TARP-Tracker.aspx

10 I adjusted these figures for inflation using the Bureau of Labor Statistics Inflation Calculator: http://data.bls.gov/cgi-bin/cpicalc.pl. 
4

Figure 1: 

Publically Traded Corporations Exceeding the Deduction Limit from 2005 to 2013

Notes: This figure shows the weighted number of estimated publically traded corporations that pay their top five executives 

salaries in excess of the salary deduction limit between 2005 and 2013. It increased by 63% from 725 to 1,185 during this 

time. This estimate is computed using the Internal Revenue Service (IRS) Statistics of Income division's (SOI) Corporation 

file. The industry classifications are the standard industry classifications for the Office of Tax Analysis in the U.S. 

Department of the Treasury. The top five industries include Service, Metal and Machinery Manufacturing, Wholesale and 

Retail Trade, Information, and Finance & Management of Companies. These five industries consistently accounted for 61% 

of firms exceeding the limit and 45% of the total nondeductible executive compensation.
5

Table 1: 

Summary Statistics for Publically Traded Corporations Exceeding 

Executive Deduction Limit from 2005 to 2013

Years

Number of 

Firms

Average Firm 

Nondeductible 

Executive 

Compensation 

(in millions)

Average Percent 

of Taxable 

Income Forgone

Total 

Nondeductible 

Executive 

Compensation 

(in millions)

2005 725 $2.8 1.88% $2,047

2006 821 $2.5 1.55% $2,013

2007 916 $2.3 1.54% $2,143

2008 984 $2.3 1.40% $2,250

2009 982 $2.2 1.36% $2,144

2010 1,076 $2.6 1.68% $2,817

2011 1,107 $2.8 1.72% $3,040

2012 1,141 $2.6 1.85% $2,983

2013 1,185 $2.6 1.83% $3,057

Total $22,493 

Notes: The second column lists the weighted number of corporations that exceeded the limit in that year. The third column 

list the average amount firms exceeded this limit. If a firm had taxable income, column four lists the average percent of their 

taxable income that they forwent because they exceeded the deduction. The last column then list total nondeductible 

compensation by all the firms in this analysis. This table shows that driving the growth of compensation over this limit has 

been the willingness of more firms to ignore this deduction limit. Total compensation exceeding this limit increased from $2 

billion to $3 billion and the number of firms exceeding the limit increased by 63% from 725 to 1,185. Yet the average 

amount that a firm exceeded the limit and the percent of taxable income forgone have been stagnant.
6

Table 2: 

Summary Statistics for Publically Traded Corporations Exceeding 

Executive Deduction Limit for Industries, 2013

Industry

Number of 

Firms

Average Firm 

Nondeductible 

Executive 

Compensation 

(in millions)

Average 

Percent of 

Taxable 

Income 

Forgone

Total 

Nondeductible 

Executive 

Compensation 

(in millions)

Agriculture, Forestry, Fishing 

and Hunting

N/A N/A N/A N/A

Mining 64 $3.2 2.2% $201.9

Utilities 47 $2.7 0.3% $124.6

Construction 17 $1.1 1.0% $18.8

Non-Durable Manufacturing 71 $1.8 1.0% $127.8

Fossil Fuels 12 $4.2 7.1% $50.4

Chemical Manufacturing 70 $3.0 2.0% $207.9

Computer and Electronic 

Manufacturing

93 $2.5 4.5% $232.2

Metal and Machinery 

Manufacturing

172 $2.4 1.7% $418.7

Wholesale and Retail Trade 160 $2.4 1.2% $391.2

Transportation and Warehousing 26 $3.1 1.6% $79.5

Information 119 $4.8 1.9% $565.9

Finance, Management of 

Companies

111 $2.4 2.0% $266.4

Insurance Carriers and Related 

Activities

22 $1.8 2.3% $38.9

Rental and Leasing Services 13 $1.7 0.8% $22.3

Real Estate N/A N/A N/A N/A

Service 182 $1.6 1.3% $291.3

Notes: The second column lists the weighted number of corporations that exceeded the limit in that year. The third column 

list the average amount firms exceeded this limit. If a firm had taxable income, column four lists the average percent of their 

taxable income that they forwent because they exceeded the deduction. The last column then list total nondeductible 

compensation by all the firms in this analysis. This table shows that driving the growth of compensation over this limit has 

been the willingness of more firms to ignore this deduction limit. Information for industries with fewer than five firms is not 

provided.