Uncle Sam giveth and taketh away with executive salary administration

by on June 30, 2009 · 0 Comment POSTED IN: HR Info Center

Boards and government are exercising control over executive salary administration with greater frequency

The board has the right to do that. Congress is working on giving shareholders more rights in executive compensation decisions as a minority investor to have more say on compensation. That’s probably a good thing. In executive salary administration, it’s always you’re walking a tight rope balancing Fair Market Value pay with prudent investor returns. And it is a tight rope. And the board is in a difficult position in those situations.

Executive salary administration and government regulation
Reasonable compensation in executive salary administration has been around for almost 80 years. The IRS still doesn’t have a definition of reasonable comp. The judicial system through the many years of trials on this issue of reasonable comp has kind of come up with, 16 different factors that describe what should be considered in reasonable compensation. But there’s no mechanical way to do it. And there probably never will be.

And so, my question is if the IRS can’t define it in 80 years, how do we expect our Congress to do it in four? Obviously, emotions are in the way of clear decision making. And how many of us would want to work in an executive position where we had a 90% tax on our bonus?

The intermediate sanctions, again, this issue has been around since 1995 and applies to nonprofit. Basically the IRS had one mechanism to manage excessive compensation in nonprofits, that was revoking the tax exemption. Now, they have a penalty power that they can assess penalties on both the board and the executive to the extent there is executive compensation. However, it’s only been in the last couple of years that they’ve actually done anything with that. And those cases were a couple of egregious cases.

So, we need to look at all this stuff. They’ve tried to do this for years. We as consultants try to find a way around it and get to the right answer. And that’s part of what we’re facing now with the financial institutions with the TARP limitations imposed on them

Chaining federal regulations and executive salary administration
Government regulations regarding executive salary administration are changing by the minute, changing by the day. But with the $1,000,000 limit on compensation that’s imposed on the salary and bonus. And there are also limits on how much equity can be granted although the definition of how you define that is still moving around all over the place.

So I think as organizations take money from the federal government, if they’re in distress, obviously they need to do the right thing. And if they’re paying executive comp, they need to adjust that.

I think we get into situations with salary administration where the government imposes these because of political pressure, emotions or otherwise, they have a tendency not to work.

And when you look at all these things, the golden parachute limits I think are a great answer because what that does is it takes the board off the hook for Title VII potential exposure to them personally for discrimination.

Edited remarks from the Rapid Learning Institute webinar: “Executive Compensation Trends: New Benchmarks & Changing Regulations” by Edward Rataj and Kevin Nussbaum

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