The Unreasonable Case for a Reasonable Compensation Standard in the Public Company Context: Why it is Unreasonable to Insist on Reasonableness

Executive compensation at public corporations reached excessive levels during the 2008 financial crisis, with CEOs earning millions while companies failed and workers lost jobs. Lazar examines whether tax law, specifically Internal Revenue Code Section 162(a)(1), should regulate executive compensation through a reasonableness standard. The article explores the historical debate over excessive pay, tracing public outrage from the 1930s Depression through contemporary scandals involving Kerry Killinger (Washington Mutual), Aubrey McClendon (Chesapeake Energy), and Ken Lewis (Bank of America). Lazar argues that while executive compensation appears excessive and inflammatory, imposing tax-based reasonableness standards is inappropriate policy. He contends that Section 162(a)(1)'s deduction for reasonable compensation applies primarily to closely held companies, not public corporations where agency costs differ fundamentally. Lazar demonstrates that prior attempts to limit executive compensation through tax legislation failed to achieve intended goals and may have increased executive pay. He argues that economic analysis reveals termination rights' paradoxical effects—creating lottery-like outcomes for successful authors while reducing individual gains for most. Lazar concludes that author termination rights as currently structured are likely undesirable within copyright's utilitarian theory, potentially hindering socially desirable creative investments.

Topics: Corporate Law · Tax Law

Keywords: executive compensation · Section 162(a)(1) · public corporations · reasonableness standard · CEO pay · agency costs