Page 161 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 147

Year Exempt Allowance Tax Rate

2002 $1 million 50%
2003 1 million 49%
2004 1.4 million 48%
2005 1.5 million 47%
2006 2 million 46%
2007 2 million 45%
2008 2 million 45%
2009 3.5 million 45%
2010 no tax
2011 1 million 55%

Table 4-28. Estate taxes

Estate taxes are of concern to executives wanting to ensure that survivors receive
adequate funds, but planning an after-tax distribution has been difficult due to changing
estate tax rules. The Economic Growth and Tax Reconciliation Tax Act of 2001 made
timing of death very important (as shown in Table 4-28). Clearly it is most advantageous
to the heirs for death to occur in 2010 (which may make a few executives nervous about
possible planted banana peels or other vehicles for a departure from this vale of tears).
With these considerations in mind, let’s move on to the next rulemaker, the Securities
and Exchange Commission (SEC).

The Securities and Exchange Commission. The SEC came into being with the 1933
Securities Act and the Securities Exchange Act of 1934. The intent of Congress was to
protect the investor from unscrupulous individuals and firms. The first law focuses on
distribution of securities and the second on trading of securities after distribution.
The sale of stock either has to be registered with the SEC or considered to be exempt
for one of the following reasons: small amounts of capital are involved, raising capital is not
the purpose, or investors are sophisticated and have information access. The main focus is on
disclosure through the establishment of financial accounting and reporting standards for all
publicly held companies. Its impact is seen in the annual report of the company, with both an
income statement and balance sheet, and its proxy statement sent to shareholders prior to the
annual meeting. Additionally, the SEC requires publicly held companies to file annually a
Form 10-K, which provides financial and related business information, including background
on the corporate officers. They are also required to file a 10Q (an abbreviated version of the
10K) after completion of each of the company’s first three fiscal quarters. Both the income
statement and the balance sheet are used in identifying measurements to be used in short-
and long-term incentive pay. A number of such performance measurements were described
in Chapter 2.
American Institute for Certified Public Accountants. To provide a level playing field in
financial reporting, the American Institute for Certified Public Accountants (AICPA) issued
various interpretative bulletins from 1939 to 1959. In 1951 it issued Bulletin No. 43,
“Compensation Involved in Stock Options and Stock Purchase Plans,” prescribing rules for