Page 667 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

652 The Complete Guide to Executive Compensation

nonforfeitable). It also discussed the tax principles of constructive receipt and economic
benefit, the impact of the 2004 American Jobs Creation Act on deferrals, the accounting and
tax treatment to both the company and the individual; the SEC requirements, the advantages
and disadvantages of deferrals, and the questions to be answered in deciding whether or not
to defer compensation.

CHAPTER 4: THE STAKEHOLDERS

The stakeholders affect to varying degrees the design of executive compensation. They
include executives, other employees, customers, suppliers, shareholders, and the community.
The latter includes the business press and the rulemakers (namely, the legislators and the
regulators). The major regulators affecting executive pay are the Financial Standards
Accounting Board (FASB), the Internal Revenue Service (IRS), and the Securities and
Exchange Commission (SEC). Another group that is part community and part shareholder
focused are the watchdogs, those organizations that monitor company performance and pro-
vide guidance to shareholders on whether to buy, sell, or hold. Some also give guidance on
how to vote on shareholder resolutions at the company annual meeting. Each of these stake-
holders is defined and described, and how their desires shape executive pay plans is discussed.

CHAPTER 5: SALARY

Salary is the compensation element on which short-term and long-term incentives, as well as
employee benefits and perquisites, are based. Current salary is a combination of merit and
promotion increases, with the latter being the dominant portion for highly paid executives
who have worked their way up the organization. When incentives are available, the salary ele-
ment may be used primarily to reward ongoing work, with incentives rewarding achievement
of specific goals or objectives.
Salary is reportable as earned income to the individual and tax deductible to the com-
pany up to $1 million a year. To the extent that salary exceeds $1 million for the five proxy-
named executive officers, the excess amount is not tax deductible because of Section 162(m)
of the Internal Revenue Code. This annual limit applies not only to salary but also to all
annual pay that does not meet the performance-based definitions within Section 162(m).
Salary is reported in the proxy for the year in which is paid.

CHAPTER 6: EMPLOYEE BENEFITS AND PERQUISITES

Employee benefits deal with providing time off with pay, service programs, health care,
survivor protection, and retirement coverage for all employees in the organization.
Perquisites (or executive benefits) are given only to executives. Perks begin where employee
benefits end. Perquisites are either restorative (replacing an employee benefit taken away by
law, such as limits on pension plans) or additive (given in addition to the employee benefit
received by all, such as additional life insurance, or received by none, such as company cars).
Employee benefit eligibility is normally based on factors such as age, years of service, and
level of pay. Perquisites are based on organization level. Like employee benefits, perks have
a low risk factor because degree of participation is not varied with performance. In addition,
once given they are rarely taken away.