Executive Compensation Basics
What is the most common form of executive compensation?
Base salary, bonuses, and stock options
What is the rule that governs the tax deductibility of executive compensation?
Section 162(m)
Which types of businesses are covered by Section 162(m)?
Publicly traded companies
What type of book-tax differences arise from executive compensation?
Permanent and temporary differences
What’s the difference between base salary and total compensation?
Base salary is fixed pay, while total compensation includes salary, bonuses, stock options, and benefits.
How much executive compensation is deductible under Section 162(m)?
$1 million
Which executives are specifically covered by Section 162(m)?
CEO
CFO
3 other highest-paid officers
Are the book-tax differences related to executive compensation favorable or unfavorable?
Unfavorable differences
Calculate the total compensation of an executive earning a base salary of $500,000, a bonus of $200,000, and stock options valued at $300,000.
Total compensation = $500,000 + $200,000 + $300,000 = $1,000,000.
Why was Section 162(m) enacted?
To limit excessive executive compensation
What is the key reason for applying Section 162(m) to these specific executives?
To limit excessive compensation and prevent tax avoidance
What is the primary difference between book and tax treatment of executive compensation?
$1 million limit on tax deductibility that doesn’t apply to book income
If an executive’s bonus is 10% of profits and the company makes $5 million in profit, how much is their bonus?
$5,000,000 × 10% = $500,000.
How does the current Section 162(m) differ from prior rules regarding executive compensation?
The removal of exceptions for performance-based compensation under the Tax Cuts and Jobs Act (TCJA) of 2017.
A publicly traded company pays its CFO $1.2 million in non-performance-based compensation. How much of this is non-deductible?
$200,000
A company pays its CFO $2 million in stock options, of which $1 million is recognized as a book expense. How much of the stock option expense is deductible for tax purposes this year, assuming the options haven’t been exercised?
$0 (hasn't been exercised)
If an executive earns a base salary of $600,000 and their total compensation is $1.2 million, what percentage of their compensation comes from non-salary sources?
Non-salary compensation = $1.2M - $600K = $600K
Non-salary percentage = ($600K / $1.2M) × 100 = 50%.
A company pays its CEO $2 million in compensation, including $500,000 in performance-based pay. How much is deductible for tax purposes under the current rule?
$1 million
A publicly traded company compensates its CEO $3 million in total, with $1 million in salary and $2 million in stock options. If the stock options do not qualify for special treatment, how much compensation is non-deductible?
$2 million
A company pays an executive $3 million in salary and $2 million in stock options. The stock options are expensed for book purposes in the current year but will be deducted for tax purposes next year. How much book-tax difference is created this year?
$2 million, creating a temporary difference