The domestic stock market has been blessed with record or near record profit margins in 2005. John Hussman of Hussman Funds has been commenting on the subject in his weekly commentary, of which this is a good example. One would think that for equity investors this would be a good thing. We would submit that there is a damaging side effect of this prosperity.

In short, the outrage over executive pay seems to have diminished. Mark Maremont in the Wall Street Journal reports on yet another disturbing trend in executive pay. The widespread use of “tax gross-ups” allow companies to pay executives taxes in a less than open manner.

Amid soaring CEO compensation, a number of companies are paying extra sums to cover executives’ personal tax bills. Many companies are paying taxes due on core elements of executive pay, such as stock grants, signing bonuses and severance packages. Others are reimbursing taxes on corporate perquisites, which are treated as income by the Internal Revenue Service. They run the gamut from personal travel aboard corporate jets to country-club memberships and shopping excursions.

“This smacks of Leona Helmsley-like treatment, that only little people pay taxes,” says Patrick McGurn, an executive vice president of Institutional Shareholder Services Inc., an influential adviser to big investors that often critiques companies’ corporate-governance practices. For these top executives, he says, companies “are removing taxes from the list of inevitable life experiences, leaving only death.”

This would be depressing if it were not so predictable. As one type of compensation becomes passe, i.e. salary, companies come up with less transparent ways to pay their executives. So long as profit margins remain high it is unlikely that these payments, and other pay schemes, will not provoke widespread anger. One can hope that the rise in activist hedge funds can agitate for some sanity in executive pay.

In an another executive payment development, Under the Counter comments on the fact that at investment banks, bonus pools are being disproportionately allocated towards the upper ranks. While middle rank investment banker may not be the most sympathetic class, it is yet another example of executives taking advantage of record profits to up their own pay.