Sunday, March 15, 2015

Income Disparity and Bribes

Occasionally you will read a business story about some great CEO flying in to save a sale.  At first you will nod approvingly about a hard working executive protecting his company.  But then you might wonder, doesn’t this company have sales people? Is he going to fix general ledger next week and lead the research break through the week after that?  The answer is that the Chief Executive is the only one left who can lay down the cash briefcase.
In the old days, the disparity between lowest and highest compensation in a company was about 10 to 15 to 1. Now the disparity is enormous.  Like most government disasters, this was caused by reform.  Back in the sixties a Texas firm demonstrating good old fashioned American ingenuity was caught paying incentives to its sales employees out of its discretionary account.  Recognizing a loophole of gigantic proportions that anyone could use, Congress with the advice of the IRS passed legislation changing the accounting rules and made bribery illegal.  Up until that time while bribery was illegal in several jurisdictions, it did have a place in accounting practice under variously titled entries commonly known as slush fund or petty cash.  The justification was that these funds were allocated for “foreign” business activities where such practices were customary.  Places like New Mexico.  This rubric about foreign practice was repeated too often and that was made specifically illegal as well.
This means that bribes have to be paid out on an after tax basis, except, of course, when corporations operate through nonprofits, promotions, foreign partners or foreign subsidiaries. Good old fashioned cash has to come out of the boss’s pocket.  The discretionary fund entry has moved to corporate executive compensation. This is the major reason that executive compensation has ballooned.  It’s not simply that boards of directors are spineless sycophants; it is how business gets done.
In some other countries the old ratio of compensation is still in effect.  Those countries still allow slush funds.  So their upper management does not have the responsibility of sealing the deal.
The IRS now gets its cut.  Consider this from the point of view of the executive.  Not only has his liability increased and he has to participate in dubious adventures and expenses to wash this money through to its intended recipients, but his costs have dramatically increased as well, small wonder that the major complaint of the 1% is taxes.  The impact on legislation is the worst consequence.  When these funds were administered by lower level employees it was poor form to use them for anything other than improving the company’s market position.  Now furthering class interest is justified as providing cover for corporate objectives.

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