In 1993, President Clinton signed into law his first budget, which created section 162(m) of the Internal Revenue Code. This provision stated that companies could only deduct the first $1 million of compensation for their top five executives from their corporate taxes. The idea was to discourage companies from paying in excess of $1 million, as additional compensation would be taxed. It didn’t work.

According to a paper written by Temple University’s Steven Balsam published by the Economic Policy Institute, the big flaw in 162(m) was its broad exemption of “performance-based” pay. The $1 million cap only applied to traditional salaries. Stock options and other performance incentives are considered performance-based pay and are deductible even in excess of $1 mill...

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