Internal Revenue Code Section 162 limits the amount of deductible compensation that a company can pay to the CEO and its top four other most highly paid officers. The limit currently is $1 million annually. However, companies do not face any such restrictions on deducting incentive-based pay, such as stock options, given to these executives.
a. Does the non-deductibility of high salaries conform to the financial accounting matching principle?
b. Should the Internal Revenue Code be used in this manner to influence executive pay levels?