Current “Excess Compensation” rules

From Sue, a CPA

There are already limitations on executive compensation, and they already take the form of disallowing tax deductions and a tax penalty on the person receiving the compensation. There is no law capping executive compensation (yet).

First, there is no tax deduction allowed to corporations for compensation above $1,000,000. But of course there’s a loophole, which is: It doesn’t apply to compensation the employee *actually earned* — by which they mean the payment of commissions, and payment for meeting performance goals preapproved by the BoD and shareholders. These rules are under Internal Revenue Code section 162(m).

Second, there is no tax deduction allowed for “excess parachute payments” in connection with a “change in control” in the ownership of a corporation’s stock. The excess parachute amount is defined as the “excess amount” over a “base amount.” The base amount is the average of compensation for the last five years (whatever the amount). There is no “golden parachute” unless the payment is equal to or more than 3 times the 5-year average. The law applies to all employees in highest paid 1% of employees of the corporation or, if less, the highest paid 250 employees of the corporation. These rules are under Internal Revenue Code section 280G.

There appears to be no difference between the laws already on the books and those proposed in the Wall Street Executive Full Compensation Guarantee Act (aka Bailout Package)

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