A proposed rule under the Dodd-Frank Act would require Wall Street firms with $250 billion or more in assets to defer bonuses to top executives for four years (instead of the current three years). The rule is meant to curb risk-taking. Political rhetoric by some presidential candidates has also taken aim at Wall Street compensation. Why should small business owners on Main Street care what happens to executive compensation for those on Wall Street?
Here’s the reason I care: It comes down to government regulation. If the government can tell certain companies how much they can pay, and when, the government can also tell small business owners what they can reap from their companies. There are already various rules impacting what businesses can pay, and most of these rules already impact small businesses.
Here’s a summary:
Tax limits on compensation. Only reasonable compensation is tax deductible. The issue only comes up for owners and other top management, primarily in connection with C corporations. There’s no dollar amount for it; it depends on facts and circumstances (what would a hypothetical independent investor in the business pay for compensation to owners and top management?). Compensation to S corporation owner-employees must also be reasonable so that it’s not low-balled to avoid employment taxes.
No tax deduction can be claimed by a firm that pays reasonable compensation if it exceeds a set amount in certain situations: up to $1 million ($500,000 for the top 5 executives in medical insurance companies and companies directly assisted by the government under the Emergency Stabilization Act) and up to $500,000 for compensation to service providers covered by a Covered Health Insurance Provider (CHIP).
DOL minimum compensation rules. The Department of Labor, states, and some municipalities have minimum wage rules that require employers to pay workers at least a minimum hourly rate. By executive order, there’s a special federal minimum wage rule that applies to federal contractors, including small businesses that do work for the government. What’s more, a pending rule that is expected to take effect shortly would hike the compensation limit for employees subject to overtime pay rules.
Bottom line
Small businesses are hypersensitive to the marketplace. If competitors raise their compensation, most others try to follow suit in order to attract and retain good employees. In other words, the marketplace sets the level of compensation.
Does this mean I oppose minimum wage rates? Not necessarily; they’ve been in place since 1938 (the hourly rate was fixed at that time at 25¢ per hour, which if adjusted for inflation would be $4.22 in 2016). I’m just leery of government setting a rate that will work for all. If the rate is too high, small businesses will be forced to cut the number of workers, reduce hours, or find non-labor solutions (e.g., robotics). Let’s all be cautious of government action regarding compensation.
