Page 280 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

266 The Complete Guide to Executive Compensation

An extension of the luxurious office is the executive washroom. It can range from a sim-
ple basin and toilet to a facility resembling a Roman bath in style, size, and opulence.
Variables include tub, shower, sauna, and dressing table. Locations range from centrally
located communal facilities under special lock to individual rooms located adjacent to exec-
utive offices (usually with private entrances from within the offices). Like the office furnish-
ings, executive wash-rooms are tax-deductible expenses for the corporation without incurring
liabilities for the executive. Lavish offices are worth at least a moderate rating.
In today’s office environment, some executives no longer have the best. Instead of
enclosed offices, some are losing their walls to chest-level partitions in order to promote flow
and communication. And, instead of being by the windows, they are in the center of the floor
(and the work flow) thereby giving this a low rating. Meanwhile, non-executives are being
given more latitude to personalize their work area.
Summary of Service Programs

A summary of both the tax effectiveness and the perceived importance of service programs to
executives is shown in Table 6-10. As can be seen, many of the perks are perceived as impor-
tant even though they impute income that may or may not be tax deductible. The 2006 SEC
requirements, however, are that perquisites in aggregate that exceed $10,000 for any proxy-
named executive or director must be disclosed in the Summary Compensation Table in the
proxy and item(s) described in the footnotes. Given SEC requirements of reporting
perquisites in the proxy statement, companies are more likely to cutback rather than continue
(much less expand) this group of pay-for-position (rather for performance) executive benefits.
Note that in the “importance to executive” section of the table, “EB” (employee bene-
fits) and “P” (perquisites) are used when the all-employee and executive benefit coverages
are different. A is used when both groups are comparable. The “TE” section rates the tax
effectiveness to employee benefits (EB) on a scale of 1 to 5, with 1 being highly effective, and
to perquisites (P) on a scale of A to D, with A being highly effective. (See Table 6-3.) An *
indicates the rating depends on coverage.

HEALTH CARE

Certainly one of the most cost-effective benefits is reimbursement for medical expenses. It
is tax deductible to the company, while the recipient has no income-tax liability. Section 105
of the IRC describes the requirements that must be met. Nonreimbursed health-care
expenses are deductible in accordance with Section 213 of the IRC but only if in the aggre-
gate they exceed 7.5 percent of adjusted gross income. For executives, they are a large
amount of nondeductible expenses. Therefore, company-reimbursed medical expenses
(tax deductible to the company and not taxable to the individual) are of interest to the
executive. The degree of interest is a function of the cost that would otherwise have to be
paid by the executive.
Some companies give executives and their families health-care coverage in excess of that
provided by the company plans while the executives are active employees. A few extend the
coverage into retirement. Since the 1978 Revenue Act eliminated the tax deductibility of
such discriminatory plans, the company either has to absorb the full cost or pass it on to the
executive, possibly paying the individual’s taxes on the imputed income of such plans.