Page 237 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 5. Salary 223

reduced because of the nondeductible portion. The tax effectiveness of salary was described in
Chapter 4. This annual limit applies not simply to salary, but to all annual pay that does not
meet Section 162(m) of the Internal Revenue Code. The Omnibus Budget Reconciliation Act
of 1993 added this section. This limit will be discussed further in Chapters 7 and 8. Ways will
be described whereby amounts in excess of $1 million can be deducted by the company.
However, there appears to be no way to exclude the salary portion of annual pay from the
Section 162(m) limit.
In addition to tax deductibility restraints, there is another very good reason for putting
a restraint on the salary of the CEO. It effectively puts a lid on the salary of others in the
organization, permitting the emphasis on incentive pay (which will be discussed in Chapters
7 and 8). For example, setting salary at the 25th percentile and salary plus incentive pay at the
50th percentile permits a major shift to incentives.
The accounting and tax treatment of salary is highlighted in Table 5-43.

Company
Paid Individual Tax Expense Charge Tax Deduction
Liability

Currently Now-Ordinary Now Now
income

Deferred Later-Ordinary Now Later
income

Principle When received When known When paid
Table 5-43. Summary of accounting and tax treatment of current and deferred salary

Table 5-44 summarizes the major considerations when designing the salary plan. Within
the framework of the design considerations listed in Table 5-44, the action steps are listed in
Table 5-45.

1. Size of organization
2. Number of jobs or positions
3. Type of job-evaluation plan
4. Respective roles of human resources and management
5. Availability of comparable jobs in the marketplace
6. Importance of formal salary ranges
7. Pay progression within a range structure
8. Peformance evaluation
9. Salary review frequency
10. Budgets

Table 5-44. Salary plan design considerations