Federal regulation of executive compensation is carried out by a combination of federal agencies, including the Internal Revenue Service and the Securities & Exchange Commission through two primary methods – taxation and disclosure.
- Taxation: The federal government regulates executive compensation by providing for differing tax and accounting treatment for executive pay. Through the differing treatment, the federal government is able to promote ordiscourage the use of certain forms compensation as well as seek to limit the amount of compensation paid to executives. For example, the Internal Revenue Code has provisions which directly impact the deductibility of executive compensation thereby impacting how much companies pay and how they structure their compensation plans. Additionally, government defense contractors may be subject to additional limitations on deductibility for executive compensation-related payments.
- Disclosure: The Securities & Exchange Commission regulates executive compensation through its disclosure-based system designed to provide investors with all the necessary material information concerning an investment are able to appropriately make sound investment decisions and to vote for or against company directors. Congress and the SEC have determined that executive compensation-related information is material to investors and therefore require that it be disclosed to investors in a company’s annual proxy statement.