Tax implications in an executive compensation system

by on July 2, 2009 · 0 Comment POSTED IN: HR Info Center

Executive compensation system design needs to look at the consequences of taxation from day one

Be concerned with the impact of taxes in an executive compensation system from day one. . You want to make sure that when you’re paying people, your not creating a taxable event that maybe didn’t get them any cash in terms of the payout that they’re getting, For example, section 83, determines how property will be taxed when it is transferred to people. It applies both to private properties as well as public companies and it’s not really a section that people focus on a lot because it’s kind of common sense. If you have the right to receive property then you say, “Well, you don’t really give it to me right now” – you probably have created constructive receipt and immediate taxation for the executives.

Deferred compensation plans and the tax implications for an executive compensation system

Something we want to be careful with especially when we deal with deferred compensation plans in an executive compensation system. If you’re a public company and you think you’re going to be paying anybody more than a million dollars, you’re going to want to be concerned with IR code section 162(m), whereby salaries over $1 million are not tax deductible unless the salary is performance based.

And looking in the back, you’ll find that your definition or my definition and the government definition of performance base may not always be exactly the same. A company may be subject to a change in control or may be acquiring another company because this section limits the amount of tax deductibility for senior for executives. And may in fact, because an excise tax to be imputed against the executive based on how much they received as part of the change of control.

The compensation system liable for taxation includes severance, special bonus payments, things like accelerated stock options or accelerated long-term incentives — could all end up getting caught up in this. And the cost to companies can be very, very great so it’s a tie – it’s something that we spend an awful lot of time looking at – in the event there is any kind of an acquisition or anything going on.

Edited remarks from the Rapid Learning Institute webinar-Executive Compensation: What Worked and What’s Fair by Steve Hall

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