Page 104 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

90 The Complete Guide to Executive Compensation

Individual
The executive has no accounting issue, only one of taxation. If the individual made a Section
83(b) election, choosing to be taxed at time of award (rather than payment), the gain on the
stock price (if any) will receive long-term capital gains tax treatment. If no election was made,
the full value of the stock received would be taxed as ordinary income, just as if it were cash.
A stock award with no 83(b) election is illustrated in Table 3-2.

Issues Award Paid Out
Time lapse Now Five years later

Stock price $100 $130

Individual income 0 $130
Company
• Tax deduction 0 $130
• Expense* $100 0

* Accrued over period until paid out
Table 3-2. Tax and accounting example

SEC REQUIREMENTS
Funded, voluntary, nonqualified deferral compensation arrangements are considered securi-
ties under the Securities Act of 1933, which requires registration of an offer or sale of
securities unless an exemption is available. The SEC also requires disclosure in the proxy of
interest paid on deferred compensation that is in excess of 120 percent of the IRS applicable
market rate for the named officers. An amendment to a deferred compensation plan is likely
to require the filing of Form 8K to the SEC. If not, it would probably be included in the next
10-Q or 10-K.

DEFERRAL ADVANTAGES

There are currently a number of advantages to deferring compensation. These include the
following:

1. Unlike many IRS rules requiring no discrimination in favor of higher employees, non-
qualified deferred agreements can be set up on a highly discriminating “pick-and-
choose” basis. Many companies will limit this to less than 5 percent of their workforce.
2. If the amount earned is paid interest or otherwise invested, the individual does not experi-
ence a loss in value due to inflation. And (if geared to appreciation in interest ratios, the
value of stock, or other property reflecting inflation) the amount is allowed to grow at a tax-
free compound rate until time of payment, when all dollars are subject to the income tax.
This is especially advantageous for long-term deferrals. For example, if a $20,000
payment is deferred for five years at 7 percent of pretax interest and then paid out, the