1 / 7

Executive Salaries: Tax Issues

Executive Salaries: Tax Issues. Highly Paid Employees (IRS Definition): One or more of the following satisfy the definition: 1. Earns > $50K/year & salary in top 20% of all employees 2. Earns > $75K/year 3. Owns > 2% of the firm equity Highly paid employee status impacts:

levia
Download Presentation

Executive Salaries: Tax Issues

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Executive Salaries: Tax Issues Highly Paid Employees (IRS Definition): One or more of the following satisfy the definition: 1. Earns > $50K/year & salary in top 20% of all employees 2. Earns > $75K/year 3. Owns > 2% of the firm equity Highly paid employee status impacts: -Qualified benefit plan status and size of contribution -Opportunity to take unpaid leave under FMLA MBAO 6600 - Executive Compensation

  2. Executive Salaries: Forms of Taxes Ordinary Income Tax Rate Joint Income Single Income 15% 0-$42K 0-$25K 28% $42K-$102K $25K-$61K 31% $102K-$156K $61K-$128K 36% $156K-$278K $128K-$278K 39.6% over $278K over $278K MBAO 6600 - Executive Compensation

  3. Executive Salaries: Forms of Taxes Capital Gains Tax - Gains realized on sale of capital assets (such as stock) • Short-term capital gains (less than 12 months) • ordinary income tax rates (up to 39.6%) • Long-term capital gains (more than 12 months) • 20% tax rate MBAO 6600 - Executive Compensation

  4. Executive Salaries: IRC ruling Million Dollar Cap on Executive Salaries: • Section 162 (m) of IRC • No Corporate Tax deduction for annual compensation that exceeds $1 million • Applies to publicly held companies - CEO & next 4 highly compensation employees. Exceptions: • Stock options: shareholder approved, admin. by comp. committee > 2 independent people • Performance-based pay: same as stock options & performance formula for determining award MBAO 6600 - Executive Compensation

  5. Executive Salaries: Determinants(Gomez-Mejia & Balkin, 1992) • Size of Firm • Stage in Life Cycle • Start-up, Growth, Mature, Decline • Industry/Sector • Service/Mfg./High Tech • private/public/non-profit • Firm Performance - weak w.r.t. salaries MBAO 6600 - Executive Compensation

  6. Significance of Executive Salary • Salary represents the most stable source of income for the executive • Salary is a benchmark to determine pay mix: • Pay Mix = variable/fixed pay • Represents degree of risk & uncertainty in earnings • PM too small - executive is too “comfortable” with earnings not motivated to take risks • PM too large - executive is too much at risk, and overly focused or distracted by pay. MBAO 6600 - Executive Compensation

  7. Significance of Executive Salary Salary is the basis of other executive pay decisions 1. Design of bonus is a percentage of salary 2. Golden parachute (executive severance pay) is a multiple of the salary 3. Executive retirement plan uses salary in the formula for retirement income. 4. Executive life and disability insurance uses salary as a basis for computing the benefit to survivors. MBAO 6600 - Executive Compensation

More Related