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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:

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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:

-Qualified benefit plan status and size of contribution

-Opportunity to take unpaid leave under FMLA

MBAO 6600 - Executive Compensation

executive salaries forms of taxes
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

executive salaries forms of taxes3
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

executive salaries irc ruling
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

executive salaries determinants gomez mejia balkin 1992
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

significance of executive salary
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

significance of executive salary7
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