Page 110 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

96 The Complete Guide to Executive Compensation

income to the decedent, it may also be considered income to the beneficiary. This
double taxation (estate tax and income tax) can cause significant liquidity problems
without sufficient life insurance to cover tax liabilities.
17. Whereas deferred compensation plans are often described as golden handcuffs locking
the executive to the corporation, often only marginal performers are really shackled to
the company. Top-quality performers invariably find someone with the key (namely,
comparable compensation to that forfeited). The result is that not only do deferrals
not retain the top performer in many situations, but equally undesirable, they make it
difficult for a less effective executive to seek alternative career opportunities.
18. Restricted stock units are covered by Section 409A, unlike restricted stock, which is
excluded.
19. Involuntary deferrals, even if the individual has no voice in how much is deferred and
when received, are covered by Section 409A.
20. A decision to defer tax at the time of exercising a stock option must be made at the time
the option is granted; a later date will result in taxes plus penalties.
21. The amount of compensation that can be deferred may be limited by laws and
regulations.
22. Deferred compensation may be subject to additional taxation.

KEY CONSIDERATIONS

The key issues that affect the appropriateness of deferring compensation include the following.
1. It must be remembered that, although the amount is being deferred for tax purposes, it
is also being deferred for investment purposes! It is logical to defer if the investment
growth is judged to be the same for both current and deferred payments. However, the
situation must be carefully examined if the growth rate on deferred payments is less
than that available through other opportunities if received immediately. In this case, the
deferral may actually cost the recipient more than is saved in taxes, even if some form
of interest is added to the deferred amount.
2. The younger executive is usually at an income level that is too low to provide any real
tax advantage. Even if this is not the case, he or she by definition has more years in
which to build up a postretirement income. Obviously, the more the deferred income
increases through pension annuities, savings, and other forms of deferrals, the higher
the income tax and the less the tax saving over current rates.
3. The recipient may need the money now to meet mortgage and college tuition costs
even though the net may be less than in later years. The countering argument is that
financial needs will be correspondingly less in postretirement years.
4. Since the main justification for deferring income is to optimize the individual’s net
income, it is imperative that the act of transferring income from years of employment
to years of retirement be carefully examined. Pension and long-term profit-sharing
plans should be examined in relation to the amount deferred until retirement, through
salary and incentive plans, to determine the total package available at postretirement as
replacement income. Forgotten considerations include looking at the loss of income in
determining retirement annuities—especially those that call for a percentage of the
last 5 or 10 years of earnings. Often overlooked is what the recipient’s total postretire-
ment income will be. Some companies have found that, taken individually, each plan