Capítulo 14 StudyBlue é ótimo para estudar. Eu amo os guias de estudo, flashcards e quizzes. Tão extremamente útil para todas as minhas aulas Alice. Arizona State University Sou um estudante usando StudyBlue, e posso dizer que isso me ajuda muito. Materiais de estudo para quase todos os assuntos na escola estão disponíveis no StudyBlue. É tão útil para a minha educação Tim. University of Florida StudyBlue fornece mais recursos do que outros aplicativos de estudo e, portanto, me permite aprender muito rapidamente. Eu realmente me sinto muito mais confortável tendo meus exames depois que eu estudo com este aplicativo. Sua incrível Jennifer. Rutgers University Eu amo flashcards, mas carregando em torno flashcards física é complicado e simplesmente ultrapassado. StudyBlue é exatamente o que eu estava procurandoTestimony Relativo a questões tributárias e de contabilidade relacionadas à compensação de opções de ações dos funcionários perante o Senado dos EUA Permanente Subcomissão de Investigações 5 de junho de 2007 Presidente Levin, Senador Coleman e membros do Subcomitê: Obrigado por me convidar para testemunhar Em nome da Comissão de Valores Mobiliários (Securities and Exchange Commission) sobre questões relativas à remuneração de opções de ações. Tenho o prazer de testemunhar hoje com o Comissário Interino do IRS, Kevin Brown, e compartilhar com vocês a perspectiva das Comissões de Valores Mobiliários e perspectivas sobre esta forma de compensação, que se tornou um componente significativo da remuneração dos executivos entre as empresas públicas atuais. Crescimento da Compensação de Opções de Ações - Tendências Atuais O crescimento da remuneração baseada em ações - particularmente na forma de prêmios de opções de ações de funcionários - tem paralelo ao crescimento da remuneração dos executivos nas últimas três décadas. 1 De fato, alguns argumentaram que os prêmios de opções têm sido um dos principais impulsionadores desse crescimento. 2 Vários fatores podem ter contribuído para o uso generalizado de opções de ações como compensação. Ao longo da década de 1970, como as opções de ações caiu fora de favor após uma depressão prolongada no mercado de ações, pacotes de compensação dos executivos consistiu quase inteiramente de salários base e bônus em dinheiro. 4 A popularidade das opções aumentou na década de 1990, uma vez que o forte aumento dos preços de mercado tornou as opções mais lucrativas para os empregados. Então, em 1993, a Lei de Imposto de Reconciliação Omnibus adicionou Seção 162 (m) às leis de imposto federais. O artigo 162 (m) limitava a dedutibilidade da compensação acima de 1 milhão paga a alguns altos executivos, mas isentava certas compensações baseadas em desempenho, como opções de compra de ações. Como o presidente Cox observou em depoimento no outono passado: o objetivo declarado da Seção 162 (m) era controlar a taxa de crescimento da remuneração do CEO. Com uma retrospectiva completa, podemos agora todos concordar que este objectivo não foi alcançado. 5 Essa alteração na legislação tributária inclinou as práticas de remuneração para fora do salário e outras formas de compensação em dinheiro em favor de opções de ações e outros tipos de compensação não monetária a que o limite não se aplicava. 6 Além disso, as empresas se voltaram cada vez mais para as opções como uma forma de compensação porque acreditavam que ajudavam a alinhar os incentivos dos acionistas e gerentes. E, para empresas em crescimento emergente, o uso de opções de ações como compensação ofereceu uma maneira de conservar recursos ao mesmo tempo em que atraía talentos de alto nível em mercados altamente competitivos. 7 De acordo com a literatura acadêmica, entre 1992 e 2002, o valor ajustado pela inflação das opções de empregados outorgadas pelas empresas na SampP 500 passou de uma média de 22 milhões por empresa para 141 milhões por empresa, elevando-se para 238 milhões por empresa 2000. 8 Um estudo acadêmico que referenciamos mostrou que, enquanto em 1992 as opções de ações representavam apenas 24% do pacote salarial médio para esses CEOs, em 2002 as opções representavam aproximadamente metade da remuneração total dos CEOs típicos. 9 A prática de outorgar prêmios de opção não se limitou ao escalão superior de executivos da empresa. O percentual de subsídios de opção para todos os funcionários também tem crescido, 10 se não no mesmo ritmo que o estrato mais alto de executivos corporativos. 11 No entanto, é importante esclarecer que a Comissão é e deve ser um observador neutro em matéria de remuneração dos executivos. Como uma agência de divulgação, procuramos constantemente melhorar o mix total de informações disponíveis para investidores e outros no mercado. Portanto, nos concentramos em assegurar que a descrição das decisões e práticas de compensação da empresa em seus documentos de divulgação seja suficientemente transparente para que os investidores possam avaliar corretamente as informações e chegar a suas próprias conclusões a perguntas como se a comissão de remuneração está fazendo julgamentos sólidos e informados Sobre a remuneração dos executivos, como os ativos da empresa estão sendo usados para compensação e quais incentivos e recompensas estão sendo fornecidos à administração. Compete à Comissão não julgar o que constitui o nível correcto de indemnização nem impor limites ao que a administração e outros trabalhadores recebem. Um de nossos princípios centrais é que cabe aos conselhos de administração, como eles são influenciados pelas forças de mercado, determinar como compensar de forma justa o pessoal da empresa e que os acionistas precisam de uma divulgação completa e transparente sobre o pagamento dos executivos para tomar decisões informadas sobre Quem eleger como diretores. Abusos de Opções de Ações e Práticas Impróprias À medida que o uso de compensação de opções aumentou, no entanto, vimos alguns abusos também. Aprendemos que algumas empresas e seus executivos abusaram de programas de opções de ações por meio de datas de concessão de atraso indevidas. Ou seja, eles deturparam a data de um prêmio de opção para fazer parecer que a opção foi concedida em uma data anterior - e a um preço menor - do que quando a concessão foi realmente feita. A intenção das concessões de opções de retrocesso é permitir que o beneficiário da opção potencialmente realize maiores ganhos eventuais, mas ainda caracterize as opções como tendo sido concedidas no dinheiro - disfarçando o fato de que ele ou ela recebeu as opções com um preço de exercício abaixo do Do preço de mercado atual do estoque da companhia. Também aprendemos que os funcionários, incluindo os executivos, podem às vezes ter exercícios de opção antigos. Esta prática envolve a falsificação da data em que uma opção é exercida para fazer parecer que o exercício ocorreu em data anterior - quando os preços de mercado eram mais baixos - do que quando o exercício realmente ocorreu. A consequência neste caso é subestimar aos investidores o benefício do exercício para o executivo que exerce e reduzir a responsabilidade fiscal final do empregado. Esta redução na taxa de imposto de funcionários é muitas vezes obtida em detrimento da empresa através de uma dedução fiscal mais baixa. Nos seus esforços para assegurar uma divulgação completa e justa e um campo de jogo igual para todos os investidores, a Comissão tem-se mostrado muito activa ao revelar e procurar corrigir estas práticas. Até à data, a Comissão acusou dois emitentes e catorze indivíduos (afiliados a oito emitentes) de práticas inadequadas de concessão de opções sobre acções. Dos indivíduos acusados, sete se estabeleceram, e sete estão litigando. Dos sete réus declarados, cinco pagaram disgorgement e interesse de prejulgamento, e quatro pagaram penalidades civis. Além disso, dos sete réus estabelecidos, seis concordaram com barras permanentes em servir como um oficial ou diretor de uma empresa pública, e quatro concordaram em suspensões permanentes de prática perante a Comissão. Os casos apresentados até agora demonstram alguns dos tipos de práticas fraudulentas que vimos nesta área. Eles envolvem tanto backdated opção concessões e backdated exercícios que reduzem os destinatários impostos à custa dos accionistas. Alguns envolvem opções fraudulentas concedidas aos altos executivos, e alguns envolvem subvenções fraudulentas para classificar e arquivar os funcionários. Infelizmente, estes casos não são os únicos que a Comissão se depara neste domínio. A Divisão de Execução está atualmente investigando mais de 140 empresas sobre possíveis denúncias fraudulentas de subsídios e exercícios de opção de ações. As empresas sob investigação estão localizadas em todo o país. Eles envolvem empresas da Fortune 500 e emissores de capitais menores e abrangem vários setores da indústria. No momento, é incerto que muitos desses casos resultarão em ações de execução. Além disso, o pessoal da Comissão para a Aplicação da Lei está a partilhar informações relacionadas com as suas investigações com outras autoridades responsáveis pela aplicação da lei e autoridades reguladoras, conforme o caso, incluindo o Departamento de Justiça ea Força-Tarefa de Fraudes Corporativas dos Presidentes. Investigação. Também estamos compartilhando informações com a Receita Federal para garantir que as implicações potenciais para as leis dentro de sua jurisdição são plenamente consideradas no decurso destas investigações. Apesar do envolvimento substancial da Comissão na prossecução desta má conduta, deve salientar-se que parece que o problema tem diminuído consideravelmente nos últimos anos. A oportunidade para esses tipos de práticas abusivas foi consideravelmente reduzida como resultado da Lei Sarbanes-Oxley. Antes da Lei Sarbanes-Oxley, os diretores e diretores não eram obrigados a revelar o recebimento de bolsas de opção de ações até o final do ano fiscal em que a transação ocorreu. Sarbanes-Oxley mudou isso exigindo a divulgação em tempo real de subsídios de opção. Em agosto de 2002, pouco depois de a Sarbanes-Oxley ter entrado em vigor, a Comissão emitiu regras exigindo que os diretores e diretores divulguem quaisquer concessões de opções dentro de dois dias úteis. 12 As subvenções às opções não devem ser comunicadas no prazo de dois dias úteis, mas, de acordo com as regras adoptadas pela Comissão, estas informações devem ser apresentadas por via electrónica. Isso permite ao público acesso quase instantâneo a informações sobre bolsas de opção de ações e exercícios e torna backdating mais difícil. Em 2003, a Comissão deu mais um passo importante que contribuiu para aumentar a transparência dos planos de opções de empresas públicas. A Comissão aprovou mudanças nos padrões de listagem da Bolsa de Valores de Nova York, da Nasdaq Stock Market e da American Stock Exchange para exigir a aprovação dos acionistas de quase todos os planos de remuneração de ações. As empresas listadas nessas bolsas estão agora obrigadas a divulgar publicamente os termos materiais de seus planos de opções de ações, a fim de obter a aprovação dos acionistas. Além disso, em dezembro de 2004, o FASB emitiu a Demonstração da Norma de Contabilidade Financeira 123R, que efetivamente eliminou a vantagem contábil que anteriormente havia sido dada às opções de compra de ações emitidas à vista. Como esta nova regra contábil entrou em vigor em 2006 para a maioria das empresas, todas as opções de ações concedidas a empregados devem ser registradas como despesa nas demonstrações financeiras, independentemente de o preço de exercício estar ou não ao justo valor de mercado. Vou falar mais sobre essa mudança significativa de contabilidade no momento. Mais recentemente, no ano passado, a Comissão, por sua própria iniciativa, adotou novas regras exigindo que as companhias abertas divulguem mais detalhadamente seus prêmios de opções a determinados executivos. Como resultado, as empresas públicas agora são obrigadas a relatar essas informações em apresentações tabulares claras e fáceis de entender em suas declarações de proxy. Adoção de Regras de Divulgação de Compensação Executiva Revisada O aumento na compensação de opção de ações é apenas uma faceta de uma tendência muito maior que tem visto os tipos de prêmios e pacotes de compensação concedidos aos diretores e executivos de topo continuam a evoluir. Antes do ano passado, a Comissão não havia realizado revisões significativas de suas regras de divulgação de executivos e conselheiros em mais de 13 anos. Durante esse tempo, como as próprias regras permaneceram relativamente estáticas, os tipos de prêmios e pacotes de compensação concedidos aos diretores e executivos de topo cresceram cada vez mais complexos. Simplificando, a divulgação exigida das empresas em seus relatórios públicos não conseguiu acompanhar as mudanças no mercado. O resultado final foi que as empresas muitas vezes fizeram um trabalho pobre de dar aos seus investidores uma imagem clara da remuneração dos executivos, mesmo que a divulgação pode ter tecnicamente cumprido com as nossas regras. Presidente Cox e os outros comissários fizeram melhorar a divulgação de compensação executiva uma prioridade. A Comissão aprovou, no ano passado, revisões abrangentes das regras que regem a divulgação da remuneração de executivos e diretores. Como parte desta modernização das regras, a Comissão reformulou as exigências de divulgação para a compensação de opções, incluindo fortes novas proteções contra atrasos não revelados ou divulgação do chamado calendário de concessões de opções e de práticas antidumping. Em particular, as regras exigem: Divulgação na Tabela Resumo de Remuneração do valor anual em dólar do custo de compensação dos prêmios de opções reconhecidos pela empresa para fins de relatório financeiro de acordo com a Declaração de Normas de Contabilidade Financeira No. 123R Divulgação nas Concessões de Plan - Tabela de Prêmios Baseados no valor justo da data de outorga de uma opção no momento em que a premiação é feita O preço de exercício da opção e uma comparação do preço de exercício com o preço de mercado da data de concessão, sempre que o preço de exercício for inferior ao preço de mercado Divulgação da data de concessão de uma opção e da data em que o comitê de compensação tomou uma ação sobre a concessão se essa data difere da data de concessão e Uma descrição simples em inglês na nova seção Análise de Compensação de como a empresa determinou o momento da opção Prêmios a executivos e se a empresa tem em vigor qualquer programa, plano ou prática para definir um preço de exercício de opções com base no preço das ações em uma data diferente da data de concessão real ou a opções de opção de tempo para os executivos em coordenação com a liberação de material Informações não públicas. Outras Regras Governando Planos de Opções Além das regras e regulamentos da Comissão sobre as divulgações de opções de ações, há uma vasta gama de leis de corporações estaduais que são relevantes para este assunto. Como grande parte desse corpo de leis está fora da província da jurisdição regulatória da Comissão, eu não falarei nele neste testemunho, exceto para dar apenas o mais amplo de contornos. As leis gerais da corporação da maioria dos estados incluem disposições que regem a adoção e implementação de planos de opções de ações por uma corporação. Um plano de opções de ações necessariamente exigirá ação do conselho de administração da empresa, ou comitê, que deve autorizar a emissão de ações. Os planos de opção de compra de ações e os subsídios sob esses planos também serão ditados por e sujeitos às várias limitações e condições contidas nos documentos governamentais da empresa, incluindo seus estatutos e estatutos. Além disso, vários estados exigem a aprovação dos acionistas para conceder opções a diretores, funcionários ou funcionários da corporação ou para estabelecer um plano de opção de compra de ações. A aprovação do acionista também pode ser necessária em determinadas circunstâncias de acordo com a legislação tributária federal e sob as políticas das bolsas de valores e as leis federais de valores mobiliários. Quanto às leis federais de valores mobiliários, as empresas de capital público sujeitas às nossas regras de procuração devem cumprir os requisitos extensos dessas regras quanto à forma e à substância de suas submissões aos acionistas. Isso, obviamente, inclui o recém-revisado conjunto de regras de divulgação de compensação executiva que as empresas devem seguir quando eles estão preparando suas declarações de procuração anuais. Além disso, se uma companhia pretende tomar uma ação em uma assembléia de acionistas com respeito a qualquer plano sob o qual a remuneração em dinheiro ou não em dinheiro pode ser paga ou distribuída, nossas regras de procuração exigem que ele forneça informações detalhadas sobre o plano e seus participantes aos acionistas . 13 Relativamente a qualquer plano em que as opções possam ser concedidas, estas informações incluem os participantes elegíveis ao abrigo do plano e as características materiais dos planos, tais como o tipo, valor e valor de mercado dos títulos subjacentes às opções, os preços e datas de validade E outras condições materiais nas quais as opções podem ser exercidas, e as conseqüências do imposto de renda federal da emissão e exercício das opções para o beneficiário, bem como para a empresa. Requisitos contábeis e tributários atuais Em um plano típico de opção de compra de ações, uma empresa concede a um empregado o direito de comprar um número especificado de ações da empresa a um preço específico, conhecido como preço de exercício. O preço de exercício é geralmente definido como o preço de mercado da ação na data da concessão, ou em-o-dinheiro. Se uma opção tem um preço de exercício menor do que o preço de mercado, é considerado em dinheiro, em contraste, se uma opção tem um preço de exercício maior do que o preço de mercado, é considerado fora do dinheiro ou subaquática. Normalmente, um empregado não pode exercer a opção e adquirir o estoque subjacente até servir como um empregado por um período especificado, conhecido como o período de carência. Uma vez adquiridas, as opções geralmente podem ser exercidas até expirarem. Se um empregado deixa a empresa, ele ou ela geralmente perde quaisquer opções não vividas e geralmente tem apenas um período limitado (como 90 dias) para exercer as opções que já investiram. Antes de discutir as diferenças específicas entre o tratamento contábil eo tratamento tributário de uma opção de compra de ações típica, é importante que reconheçamos que historicamente nossos sistemas de relatórios financeiros e fiscais, porque servem a propósitos muito diferentes, não foram projetados para produzir necessariamente Alinhamento dos resultados. Embora os relatórios financeiros procurem refletir o conteúdo econômico subjacente de uma atividade, os relatórios fiscais buscam assegurar a plena e fiel implementação das leis fiscais promulgadas pelo Congresso. Não é, por conseguinte, surpreendente encontrar diferenças no tratamento contabilístico das opções de compra de acções, uma vez que estas decorrem em grande parte das diferentes finalidades a que servem os relatórios financeiros e fiscais. Com relação às opções de ações especificamente, a principal diferença está relacionada ao momento em que a compensação é medida. Para efeitos de contabilidade financeira, a compensação é tipicamente medida na data em que uma opção é concedida e reconhecida durante um período de tempo, enquanto que para fins fiscais, a compensação é tipicamente medida na data em que uma opção é exercida. Em 1972, o Conselho de Princípios Contábeis, o antecessor do Conselho de Normas de Contabilidade Financeira (FASB), emitiu uma norma contábil (Opinião 25), que exigia que a opção típica outorgasse o reconhecimento da despesa de remuneração para opções de ações de empregados somente se a opção (Ou seja, o preço de exercício da opção era inferior ao preço de mercado das ações da empresa na data da outorga). O montante, se existir, pelo qual o preço de mercado da ação é maior que o preço de exercício da opção é referido como o valor intrínseco da opção. Adicionalmente, desde que os termos da opção de compra de ações tenham sido fixados na data da outorga e não sujeitos a alteração, o valor da despesa de compensação, se houver, foi fixado na data da concessão e reconhecido durante o período de aquisição. 14 Excluindo as questões relacionadas ao retrocesso, a maioria das empresas emitiu opções at-the-money, nas quais nenhuma despesa de compensação seria reconhecida no Parecer 25, uma vez que as opções teriam um valor intrínseco de zero na data da outorga. Essas disposições da Opinião 25 criaram uma contabilização vantajosa para as opções de ações fixas concedidas à vista, uma vez que nenhuma despesa jamais seria registrada nas demonstrações financeiras para essas opções. Em 1995, o FASB emitiu a Declaração de Normas de Contabilidade Financeira No. 123 (conhecida como FAS 123), que permitiu que as empresas escolhessem registrar o valor justo da compensação baseada em ações como uma despesa ou continuar a aplicar a orientação no Parecer 25 se Certas divulgações sobre o valor justo dessas opções foram feitas nas notas de rodapé das demonstrações financeiras de uma empresa (incluindo os efeitos pró-forma sobre os ganhos). A FASB reconheceu que a decisão de permitir que as empresas continuassem a aplicar as orientações contidas no Parecer 25 foi baseada em considerações práticas e não conceituais. Em 2002, o International Accounting Standards Board (IASB) emitiu uma proposta que exigia que a remuneração baseada em ações fosse registrada pelo valor justo. Esta norma foi finalizada no início de 2004. Nessa época, algumas grandes empresas públicas norte-americanas Também estavam começando a escolher o método de contabilização baseado no valor justo no FAS 123. Em 2004, o FASB emitiu o FAS 123R, o que impede a aplicação do Opinion 25 e exige, em geral, o reconhecimento da despesa de remuneração das opções de ações do empregado com base no valor justo de Essas opções na data da concessão. O valor do valor justo, normalmente mensurado usando um instrumento de mercado ou um modelo de precificação de opções (como Black-Scholes-Merton ou um modelo binomial), é reconhecido durante o período de aquisição e o valor total da despesa de compensação a ser reconhecida é fixado em A data de concessão. Sob as leis fiscais federais, bolsas e exercícios de opções de ações podem ter consequências fiscais para as empresas e indivíduos. Benefícios fiscais (deduções) para as empresas podem surgir de opções de ações. Estas implicações talvez sejam melhor ilustradas no contexto das duas classificações fiscais comuns das opções de compra de ações para empregados - opções de ações não-estatutárias e opções de ações de incentivo. As opções de ações de incentivo são tipicamente concedidas a executivos, enquanto as opções de ações não estatutárias são normalmente concedidas a todos os tipos de funcionários, incluindo executivos, bem como outros, como consultores e diretores não-funcionários. Quando um empregado exerce opções de ações não estatutárias, a diferença entre o preço de exercício e o valor justo de mercado das ações da empresa na data do exercício é tratada como remuneração ordinária e o empregado é geralmente tributado sobre o ganho em seu orçamento ordinário Taxa de imposto de renda. O empregado é tributado na data de exercício porque esta é a data em que o empregado é capaz de realizar o benefício associado com as opções nessa data, o empregado recebeu o produto das opções (ou o estoque subjacente ou em dinheiro, se o estoque é imediatamente Vendido) e, portanto, torna-se responsável pelo imposto de renda. A empresa também tem direito a uma dedução fiscal associada sobre o ganho realizado pelo empregado no exercício. Uma vez que a dedução fiscal está vinculada a um valor intrínseco de opções na data de exercício. Que a dedução fiscal será provavelmente diferente da despesa de compensação reconhecida nas demonstrações financeiras da empresa, que se baseia no valor justo das opções na data da concessão. 15 A dedução fiscal da empresa pode ser mais ou menos do que a despesa de compensação reconhecida nas demonstrações financeiras - isso depende inteiramente do preço de mercado da ação subjacente na data do exercício. Além disso, se as opções expiram fora do dinheiro ou subaquática, o empregado não exercerá as opções ea empresa não receberá uma dedução fiscal, no entanto, a empresa terá reconhecido algum montante de despesa de compensação em suas demonstrações financeiras sob FAS 123R, desde que o empregado veste nas opções. Ao contrário das opções de ações não estatutárias, opções de ações de incentivo oferecem aos empregados um tratamento fiscal mais favorável. No exercício de uma opção de compra de ações de incentivo, qualquer ganho não é tributado como renda ordinária, embora o ganho possa estar sujeito a imposto mínimo alternativo. Em vez disso, o empregado estará sujeito a tratamento de ganhos de capital de longo prazo quando o estoque subjacente adquirido através do exercício for alienado. 16 Neste caso, o ganho de empregados não é tributado como renda ordinária da mesma forma, uma empresa não recebe qualquer dedução fiscal correspondente. No entanto, muitas opções de ações de incentivo resultam em disposições desqualificantes, nas quais o empregado não atende aos períodos mínimos de permanência exigidos, porque o estoque subjacente é vendido no mesmo dia em que a opção é exercida. Nesses casos, as opções são tratadas como opções de ações não estatutárias - o ganho dos funcionários será tributado como receita ordinária, ea empresa receberá uma dedução fiscal correspondente. A capacidade de deduzir um ganho de empregados em opções de ações não-estatutárias quando exercido pode proporcionar à empresa um tratamento fiscal favorável (maior dedução fiscal) em relação à despesa de compensação contábil reconhecida nas demonstrações financeiras em circunstâncias em que o preço de mercado da ação da empresa Aumentos superiores ao valor justo de concessão da opção. De fato, de acordo com a Norma Contábil da Opinião 25, a diferença entre o tratamento contábil eo tratamento tributário foi ainda mais acentuada, uma vez que a maioria das empresas não reconheceu qualquer despesa com opções de ações em suas demonstrações financeiras e, enquanto as opções não estatutárias estavam em - dinheiro e exercido, a dedução fiscal foi sempre maior do que a despesa para essas empresas. Subsídios antigos e exercícios antigos de opções de ações também têm implicações fiscais. No caso de concessões retroativas de opções de ações de incentivo, os subsídios supostamente feitos com o dinheiro pareceriam de fato ser concedidos em dinheiro. Se assim re-characterised, pareceriam não qualificar para o tratamento de imposto especial oferecido opções de ação de incentivo e seriam tributados preferivelmente como opções não-estatutárias. Isso poderia resultar em impostos adicionais e penalidades devidas pelo empregado e ter implicações fiscais para a empresa também, particularmente se as opções foram originalmente reivindicados como isentos do limite de 1 milhão imposto pela Seção 162 (m). As datas de exercício retroactivas de opções não estatutárias e opções de ações de incentivo podem ter implicações fiscais tanto para funcionários quanto para empresas. A discussão até agora enfatiza as diferenças entre a contabilização de opções de ações e seu tratamento tributário. Nas deliberações que levaram à emissão do FAS 123R, o FASB considerou um modelo no qual a data final de mensuração para fins de reconhecimento de despesa de remuneração seria a data de exercício (ou seja, contabilidade variável), que geralmente resultaria na mesma despesa de remuneração total A dedução fiscal da empresa para opções de ações não estatutárias. Os defensores dessa abordagem observaram que qualquer valor que o empregado perceba no momento do exercício mede adequadamente o valor da compensação paga e argumentou, portanto, que a medição final seria mais simples e direta, uma vez que a medida final de compensação é simplesmente a diferença entre o preço de mercado da Subjacente eo preço de exercício na data do exercício (ou zero, se as opções expirarem debaixo de água). No entanto, o FASB finalmente decidiu (consistente com a conclusão alcançada pelo IASB na norma I referida anteriormente) que o custo de compensação deve ser medido na data de concessão, porque essa é a data em que o empregador e o empregado concordam mutuamente nos termos de O intercâmbio de instrumentos de capital próprio para os serviços aos empregados. Nessa data, ambas as partes devem basear suas decisões no valor justo atual da opção a ser trocada, e não o seu possível valor em uma data futura. Qualquer alteração subsequente no valor da opção é um risco que o empregado assume como detentor de capital próprio da opção, semelhante ao risco que qualquer outro investidor assume ao adquirir uma opção e esse risco é tido em conta na mensuração do justo valor da opção em Data de concessão. Comparação dos Sistemas Contábil e Tributário para o Plano de Opções de Ações O M-3 visa, pela primeira vez, justapor as diferenças entre as demonstrações financeiras e o lucro tributável e as transações subjacentes de onde essas diferenças surgem. Os dados gerados a partir do primeiro lote de Planos M-3 para 2004 mostram um diferencial considerável entre o custo de compensação de opções de ações que as corporações têm gasto em suas demonstrações financeiras e as deduções fiscais que as corporações tomaram em conexão com a compensação de opção de ações que eles têm Concedidos aos trabalhadores. Embora eu gostaria de sugerir que comparar os sistemas de relatórios financeiros e fiscais é um pouco como comparar maçãs com laranjas, é mais complicado do que isso. Para os anos anteriores a 2006, antes de FAS 123R foi eficaz para a maioria das empresas, a comparação foi mais como maçãs para automóveis. Como uma empresa calculou os custos de compensação de opções de ações foi baseado em um conjunto de regras que diferem significativamente daquelas em vigor hoje. Antes do FAS 123R, a maioria das empresas expensou as opções de acordo com a Opinião 25, o que na maioria dos casos significava que nenhuma despesa foi reconhecida porque a opção foi concedida na moeda. Isso provavelmente representa grande parte do diferencial livro a imposto em 2004 (e em 2005, quando esses dados estão disponíveis). Comparando como uma empresa calcula os custos de compensação de opções de ações e deduções de impostos para esses custos após FAS 123R leva-nos de volta para as maçãs a analogia laranjas. A despesa de remuneração que uma empresa reconhece em suas demonstrações financeiras está vinculada ao valor justo de mercado da opção no momento da concessão, enquanto a dedução fiscal está vinculada a um valor intrínseco de opções na data de exercício. Dependendo do preço de mercado do estoque subjacente no momento do exercício de opções, o valor intrínseco da opção poderia ser significativo (no caso de um mercado de ações em alta) ou mínimo (no caso de um mercado relativamente estático). A adoção do FAS 123R pela maioria das empresas em 2006, sem dúvida, reduzirá o diferencial livro-a-imposto, mas a magnitude eo momento deste impacto é difícil de prever. Isso ocorre porque, de acordo com o FAS 123R, as empresas reconhecerão a despesa associada a uma concessão de opção nas demonstrações financeiras (amortizadas durante o período de carência) antes de qualquer dedução fiscal refletir-se no exercício dessa opção. Se o sistema fiscal para as empresas foi alterado para torná-lo em conformidade com o sistema de informação financeira, um efeito seria acelerar o calendário de uma empresa deduções fiscais. Aprecio muito a oportunidade de comparecer perante o Subcomitê hoje para fornecer as opiniões da Comissão sobre este importante assunto, e ficaria feliz em responder a quaisquer perguntas. Notas de fim 1 Ver geralmente, por ex. . Michael C. Jensen, Kevin J. Murphy e Eric G. Wruck, Remuneração: Where Weve Been, Como Chegamos a Aqui, Quais são os Problemas, e Como Repará-los (12 de julho de 2004). Harvard NOM Documento de Trabalho No. 04-28 ECGI - Finance Working Paper No. 44/2004. Disponível em SSRN: ssrn / abstract561305 ou DOI: 10.2139 / ssrn.561305. E veja, Lucian Arye Bebchuk e Yaniv Grinstein, O crescimento do pagamento executivo (junho 2005). NBER Working Paper No. W11443. Disponível em SSRN: ssrn / abstract752021. Bebchuk e Grinstein demonstram que a remuneração baseada em ações era composta de 55% da remuneração total paga aos cinco melhores executivos das empresas SP 500 em 2003, contra 37 da remuneração total em 1993. 2 Jensen, Murphy and Wruck, Remuneration, at 35: Executive remuneration in the US has skyrocketed over the past thirty years, propelled in large part by increases in the grant-value of option awards. 3 See generally, Christopher Cox, Chairman, U. S. Securities and Exchange Commission, Testimony Concerning Options Backdating before the U. S. Senate Committee on Banking, Housing and Urban Affairs (Sept. 6, 2006), available at www. sec. gov/news/testimony/2006/ts090606cc. htm . 4 Jensen, Murphy and Wruck, Remuneration, at 26 5 See Cox Testimony at www. sec. gov/news/testimony/2006/ts090606cc. htm. 7 See generally . por exemplo. Kevin J. Murphy, Stock-Based Pay in New Economy Firms, Journal of Accounting Economics, Vol. 34, Nos. 1-3, pp. 129-147 (Jan. 2003). 9 Jensen, Murphy and Wruck, Remuneration, at 31 11 See, e. g. . Porter, More Than Ever, It Pays to be the Top Executive and Bebchuk and Grinstein, The Growth of Executive Pay. 12 See Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Release No. 34-46421 (Aug. 27, 2002) 67 FR 56461. 13 Item 10 of Schedule 14A of the Securities Exchange Act of 1934 (17 CFR 240.14a-101). 14 Options that did not qualify for fixed accounting treatment were accounted for as variable awards. Such options were generally re-measured for purposes of recognizing compensation expense to their current intrinsic value at each financial statement date. 15 Prior to FAS 123R, the compensation expense recognized in the companys financial statements was typically the intrinsic value at the grant date . 16 This tax treatment applies only if the options and employee meet certain holding and other requirements specified in IRS regulations. Among such requirements, the options cannot be granted in-the-money and the employee must meet certain minimum holding periods for the underlying stock (stock may not be disposed of within two years of grant date or within one year of the exercise date). Modified: 06/05/2007Taxes and executive compensation Briefing Paper 344 The topic of executive compensation has long been of interest to academics, the popular press, and politicians. With the continued increase in executive compensation and resultant increase in pay disparity between those executives and the average worker, this issue is once again coming to the forefront of the public policy debate. Over the years, lawmakers have tweaked the tax code to limit disfavored forms of executive compensation, while regulators have increased the amount of disclosure companies must make. In the current Congress, Rep. Barbara Lee (D-Calif.) has introduced the Income Equity Act of 2011 (H. R. 382), which would amend the Internal Revenue Code to prohibit deductions for excessive compensation for any full-time employee compensation is defined as excessive if it exceeds either 500,000 or 25 times the compensation of the lowest-paid employee, whichever is larger. The objective of this study is to examine the impact of a prior limitation on deductibility of compensation, Internal Revenue Code Section 162(m). In contrast to much of the debate today on the need of the federal government to raise tax revenue, the primary goal of Section 162(m), which limited tax deductions for executive compensation, was not to raise revenue but to reduce excessive, non-performance-based compensationin other words, to do something about excessive compensation that 1992 presidential candidate William Jefferson Clinton campaigned against. This paper will review the effectiveness of that provision in achieving its goals, and provide information on how much revenue it has raised or lost due to deductions for executive compensation. With respect to reducing excessive, non-performance-based compensation, many consider Section 162(m) a failure, including Christopher Cox, the then-chairman of the Securities and Exchange Commission, who went so far as to suggest it belonged in the museum of unintended consequences. Sen. Charles Grassley (R-Iowa), the then-chair of the Senate Committee on Finance, was even more direct, saying: 162(m) is broken. It was well-intentioned. But it really hasn8217t worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule. Since Section 162(m) passed nearly 20 years ago, both academic and practitioner research has shown a dramatic increase in executive compensation, with little evidence that it is more closely tied to performance than before. In this paper, we estimate that corporate deductions for executive compensation have been limited by this provision, with public corporations paying, on average, an extra 2.5 billion per year in federal taxes. They continue, however, to deduct the majority of their executive compensation, with these deductions costing the U. S. Treasury an estimated 7.5 billion per year. Because actual tax return data are, by statute, confidential, our estimates are somewhat imprecise, as we have to infer both the tax deductibility of executive compensation and the corporations tax status from public filings. Our key findings are: Companies are allowed to fully deduct components of executive compensation that meet the IRS requirements to qualify as 8220performance-based.8221 One of those requirements is shareholder approval. However, only very general information is provided to shareholders. Therefore, shareholders are asked to, and usually do, approve plans without knowing whether the performance conditions are challenging or not, and the potential payouts from the plan. Performance pay, such as stock options and non-equity incentive plans, that meets the IRS requirements for the 8220performance-based8221 exception is fully deductible. Salary, bonuses, and stock grants are deductible but subject to a limit of 1 million. In 2010 our estimate was that there was 27.8 billion of executive compensation that was deductible. A total of 121.5 billion in executive compensation was deductible over the 20072010 period. Roughly 55 percent of that total was for performance-based compensation. Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions and continue to pay nondeductible executive salaries. The number of executives receiving salary exceeding the maximum deductible threshold of 1 million actually increased from 563 in 2007 to 594 in 2010. For all that Section 162(m) is intended to limit excessive executive compensation, it is the shareholders and the U. S. Treasury who have suffered financial losses. The code does not prohibit firms from paying any type of compensation instead, they are prohibited from deducting that amount on their tax return. The result is decreased company profits and diminished returns to the shareholders. Assuming a 25 percent marginal tax rate on corporate profits (a conservative estimate), revenue lost to the federal government in 2010 from deductible executive compensation was 7 billion, and the foregone federal revenue over the 20072010 period was 30.4 billion. More than half the foregone federal revenue is due to taxpayer subsidies for executive 8220performance pay.8221 Executive compensation will likely recover in the near future, exceeding levels seen in 2007. 1. Background Section 162 of the Internal Revenue Code covers trade and business expenses. As put forth in Section 162(a), entities are allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including, as noted in Section 162(a)(1), a reasonable allowance for salaries or other compensation for personal services actually rendered. However, a number of sections of the Internal Revenue Codein particular, sections 162(m), 162(m)(5), 162(m)(6), and 280(g)limit the deductibility of executive compensation. Adopted in 1993, Section 162(m), which applies to publicly traded corporations, limits the deduction for executive compensation to 1 million per covered individual,1 with an exception for qualified performance-based compensation. That is, a company can deduct 1 million of non-performance-based compensation per covered individual and an unlimited amount of performance-based compensation. In contrast to Section 162(m), sections 162(m)(5) and 162(m)(6) are more recent and narrowly targeted they apply, respectively, to Troubled Asset Relief Program (TARP) participants and health insurers. They also set a lower limit on the tax deductions allowed for compensation at 500,000 per individual, with no distinction or exception for performance-based compensation. Section 162(m)(5) was adopted in 2008 and applies to the chief executive officer (CEO), chief financial officer (CFO), and next three highest paid officers of public and private entities that accepted money under TARP. Section 162(m)(6) becomes effective in 2013, and its limitations apply to most employees of health care providers. Section 280(g) does not apply to periodic payments to employees, but rather to change in control payments.2 If the amount is equal to or greater than three times the covered individual8217s average W-2 compensation for the prior five years, the company forfeits the tax deduction for that payment, and the individual is subject to a 20 percent excise tax on the excess payment. As with sections 162(m)(5) and 162(m)(6), Section 280(g) contains no performance-based exception. To discuss the tax deductibility of executive compensation, this paper will focus on Section 162(m) because of its broader reach. Remember, it is not limited to a specific sector of the economy it limits the deduction for executive compensation in public corporations to 1 million per covered individual, with an exception for qualified performance-based compensation. To qualify as performance-based compensation, the following requirements must be met: The compensation must be paid solely on account of the executives attainment of one or more performance goals determined by an objective formula. These goals can include stock price, market share, sales, costs or earnings, and can be applied to individuals, business units, or the corporation as a whole The performance goals must be established by a compensation committee of two or more independent directors The terms must be disclosed to shareholders and approved by a majority vote and The compensation committee must certify that the performance goals have been met before payment is made. While Section 162(m) is intended to limit excessive executive compensation, this author sees several weaknesses or loopholes in the code. Regarding shareholder approval, companies need only give shareholders the most general terms when they put the compensation plan up for a vote. Shareholders are asked to, and usually do, approve plans without knowing whether the performance conditions are challenging or not, and the potential payouts from the plan. Those details are left to the compensation committee, which must set the terms no later than the first quarter of the companys fiscal year. Also problematic is that if these terms are not met, the corporation is not prohibited from paying the compensation. Instead, it is prohibited from deducting that amount on its tax return. The result is decreased company profits. The ones who suffer are the shareholdersthe same people who, even in this day of expanded compensation disclosures, are not provided with details on the executive compensation plans before being asked to vote on them, nor are they given information on the tax deductions taken or forfeited. In Section 2, we will go through the components of the compensation package and discuss the tax consequences of each. Section 3 will utilize executive compensation information disclosed in corporate proxy statementsthose required statements, useful in assessing how management is paid and identifying potential conflicts of interest, that must be filed with the U. S. Securities and Exchange Commission (Form DEF 14A)to summarize and tabulate compensation reported for each year from 2007 to 2010 and to contrast the amounts reported with those actually deductible by those corporations. Section 4 will estimate the revenue loss associated with those deductions. The paper will conclude with Section 5, which will look back on the impact of these tax provisions, specifically the limitations on deductions and their effect on executive compensation, and look forward to how certain current events, such as the adoption of say-on-pay policies, will affect the future of executive compensation. 2. Components of the executive compensation package Before we can fully explore the consequences of Section 162(m), we need to understand the executive compensation package. Hence, this section will introduce the components of the compensation package, which are summarized in the chart titled 8220Components of the compensation package,8221 and discuss their tax consequences to the executive and to the company. Salary Salary is the fixed, possibly contracted, amount of compensation that does not explicitly vary with performance. By definition, salary is not performance-based and therefore would not qualify for the performance-based exception under Section 162(m). Consequently it is taxable for the executive and deductible for the firm (subject to deduction limitations) in the year paid. It should be noted that the 1 million deduction limitation applies to all non-performance compensation in aggregate, not each individual component of that compensation. If a firm pays an executive salary of 750,000, the entire amount would be deductible. However, if it pays an additional 500,000 in other forms of non-performance compensation, its total deduction for non-performance-based compensation would be limited to 1 million the additional 250,000 is not deductible. Bonuses Bonus compensation may be conditioned on the performance of an individual, group, or corporation. Because it is conditioned upon performance, it is often paid after the end of the companys fiscal year. From the employees point of view it is taxable not in the year earned, but in the year received. For the employer, Treasury Regulation 1.404(b)-1T allows that a corporation using an accrual method of accounting can use the deduction in the year earned if an employee receives compensation within 2.5 months after the end of the employer8217s taxable year. In other words, bonuses are taxable to the executive in the year received, while deductible (subject to deduction limitations) in the year earned (under the assumption that bonuses are paid out within 2.5 months of year-end). Although bonuses are theoretically a reward for performance, they are not awarded or paid pursuant to a written plan approved by shareholders,3 and therefore do not qualify as performance-based under Section 162(m). Non-equity incentive plan compensation Similar to bonuses, non-equity incentive plan compensation may be conditioned upon individual, group, or corporate performance. The difference between the two is that non-equity incentive plan compensation is paid under a written plan, which, for purposes of this study, we will assume meets the requirements of Section 162(m).4 Consequently, payments under a non-equity incentive plan are fully taxable to the executive in the year received and deductible by the company in the year earned.5 Stock grants Stock grants occur when corporations give shares to their employees.6 They differ from stock options in that they have no exercise price. Whereas a stock option only has value if the corporation8217s share price is above the exercise price, a stock grant has value as long as the share price is above zero. Consequently, a stock grant is always worth more than a stock-option grant for the same number of shares. Stock grants can be unrestricted or restricted however, the vast majority of employee grants are restricted. For example, a restriction might be that the executive cannot sell the shares until he or she has worked for the corporation for a period of time (a typical vesting period would be three or four years). Restrictions may also be based upon performance. For example, the executive will forfeit the shares if earnings and/or stock returns do not achieve a pre-established goal.7 Once these restrictions expire, the executive has full ownership of the shares and, absent a Section 83(b) election,8 will immediately recognize taxable income equivalent to the fair value of the stock at that time. Therefore, the year of grant and the year of tax recognition are usually different. The deductibility of the stock grants as performance-based depends on those restrictions. That is, if the restrictions are based upon performance, then the stock grants may qualify for the performance-based exception under Section 162(m),9 whereas if the restrictions expire only with the passage of time, then they do not. In recent years there has been a trend to greater usage of what is now termed performance shares however, in previous years they were a distinct minority of stock grants. Consequently, the assumption made in this paper is that most of the grants made in earlier years and vesting in the observation period do not qualify for the Section 162(m) performance-based exception. The possibility is that as more grants become performance-based, the percentage and dollar amount of executive compensation that will be deductible will increase. Even performance-based stock grants, however, need not meet the requirements for deductibility. Consider the following passage from the 2012 Intel Corporation proxy statement: Section 162(m) of the tax code places a limit of 1 million on the amount of compensation that Intel may deduct in any one year with respect to its CEO and each of the next three most highly compensated executive officers (excluding the CFO). Certain performance-based compensation approved by stockholders is not subject to this deduction limit. Intel structured its 2006 Equity Incentive Plan with the intention that stock options awarded under the plan would qualify for tax deductibility. In addition, in order to maintain flexibility and promote simplicity in the administration of these arrangements, other compensation, such as OSUs, RSUs, and annual and semiannual incentive cash payments, are not designed to qualify for tax deductibility above the tax code Section 162(m) 1 million limitation. The OSUs referred to in the above passage are outperformance stock units, i. e. performance-based, and yet are not designed to qualify under Section 162(m). Stock options Stock options allow their holder to purchase one or more shares of stock at a fixed exercise price over a fixed period of time. They have value if the corporations share price at the time of exercise or purchase is greater than the exercise price. Since the exercise price is normally set at the share price on the date of grant, the ultimate value of the option depends upon the performance of a corporation8217s share price subsequent to the date of grant. That is, they can be extremely valuable when the share price rises dramatically, but can also expire worthless if the share price declines. Like stock grants, stock options are normally granted to executives with restrictions. These restrictions generally expire with the passage of time. While companies can add performance conditions to their stock options, currently that is rather infrequent. As with stock grants, the year of grant and year of tax recognition is normally different for stock options. They differ, however, in that stock grants are taxable upon expiration of the restrictions or vesting, whereas stock options are not taxable until the holder elects to exercise the options.10 The amount that is taxable is not the fair value of the shares acquired, but the bargain element or discount, i. e. the difference between the fair value of the shares acquired less the exercise or purchase price paid. Stock options are considered performance-based under Section 162(m) if they meet minimal conditions (e. g. shareholder approval, options granted with an exercise price at or above market price on date of grant), the reasoning being that the option holder can only profit from the option if the share price increases. Thus the assumption made in this study is that stock option compensation is fully deductible to the firm. Stock appreciation rights While not as popular as stock options and grants, some companies grant stock appreciation rights (SARs). Stock appreciation rights are the right to receive the increase in the value of a specified number of shares of common stock over a defined period of time. Economically, they are equivalent to stock options, with one exception. With a stock option, the executive has to purchase and then sell the shares to receive his or her profit. With a stock appreciation right, the corporation simply pays the executive, in cash or common stock, the excess of the current market price of the shares over the exercise price. Thus the executive is able to realize the benefits of a stock option without having to purchase the stock. In many cases, stock appreciation rights are granted in tandem with stock options where the executive, at the time of exercise, can choose either the stock option or stock appreciation right. For proxy-statement reporting purposes, SARs are combined with stock options. Similarly, they are treated like stock options for taxincluding Section 162(m)purposes. Consequently, for this analysis SARs will be incorporated into the broader category of stock options. Pensions and deferred compensation Deferred compensation is compensation that is earned in one period but deferred by the executive to be received in a future period. If it meets the requirements of Section 409(A) of the Internal Revenue Code, tax recognition may also be deferred until a future period. Pensions are a form of deferred compensation (covered by multiple separate sections of the Internal Revenue Code), whereby after retirement from the corporation, the employee receives a payment or series of payments. These payments may be defined by the pension plan (known as a defined benefit plan), or based upon the amounts accumulated in the employees personal retirement account (known as a defined contribution plan, one type of which is a 401(k)). If the payments are defined by the pension plan they can be based upon a number of factors including, but not limited to, number of years with the corporation, earnings while working, and level within corporation. Pensions can be structured in many ways for example, the payments can be fixed in amount, or they can be adjusted for inflation. Due to Internal Revenue Code limitations, executives are usually covered by more than one plan. That is, they participate in a primary tax qualified plan along with other employees, and have at least one supplemental non-qualified plan. The second plan is necessitated by Internal Revenue Code limitations on payments from a qualified plan. That is, in order to qualify for favorable tax treatment, the plan must be nondiscriminatory, that is, the benefits cannot be skewed in favor of highly paid employees, and the corporation cannot consider compensation in excess of a threshold, which was 250,000 for the year 2012 (Section 401(a)(17)), in determining pension benefits, nor make payments in excess of 200,000 (Section 415(b)). Most top executives make substantially larger sums. For tax purposes, both defined benefit and defined contribution plans are divided into qualified and non-qualified plans. With a qualified plan, the company can contribute or fund it currently, and take the corresponding tax deductions (above and beyond the Section 162(m) limitations), while the executive does not recognize taxable income until the future when he or she receives the payments. However, given the limitations discussed above, companies turn to non-qualified or supplemental executive retirement plans (SERPs) for the bulk of retirement payments to their executives. Because these plans are not qualified, they are unfunded, as funding would subject the executive to current taxation. To sum up, the bulk of pension and deferred-compensation payments are both taxable and deductible after retirement, at which point they are no longer disclosed in the corporate proxy statement. At that time, they will be fully deductible, as the then-retired executive will no longer be subject to Section 162(m). Thus, while the next section will discuss the amounts reported as increases in pensions and deferred compensation in the proxy statement, it will not incorporate any of those amounts when estimating the immediate tax consequences of executive compensation.11 All other compensation The proxy statement summary compensation table contains one other category, a catch-all category that encompasses everything not included in the prior headings: all other compensation. All other compensation includes items such as those infamous perquisites e. g. private airplanes, company cars, etc. For purposes of this paper, we assume that the amounts reported as all other compensation in the proxy statement are currently taxable to the executive and deductible by the company, subject to Section 162(m) limitations, as they are not performance-based. Caveat In the above summary chart, Components of the compensation package, we use the phrase 8220likely to be fully deductible8221 for a reason. As outsiders, drawing data from a large-scale database, we cannot determine precisely what is and what is not deductible. Note from above that performance-based compensation can qualify for full deductibility if the company meets the requirements set forth in the Internal Revenue Code. However, sometimes companies choose not to comply with those requirements. Consider the following excerpt from Goodyear Tire amp Rubber Companys most recent proxy statement: Tax Deductibility of Pay Section 162(m) of the Code provides that compensation paid to a public companys chief executive officer and its three other highest paid executive officers at the end of the year (other than its chief financial officer) in excess of 1 million is not deductible unless certain requirements have been satisfied. The Compensation Committee believes that awards under the Management Incentive Plan and the 2008 Performance Plan qualify for full deductibility under Section 162(m). Although compensation paid under the Executive Performance Plan is performance-based, it does not qualify for the deductibility exception for performance-based compensation since that Plan has not been approved by our shareholders. Therefore, payments under the Executive Performance Plan are subject to the Section 162(m) limitation on deductibility. Because of our significant U. S. deferred tax assets from prior periods, the limitation on deductibility has no impact on our financial position. In reviewing and considering payouts or earnings under the Executive Performance Plan, the Compensation Committee considered not only the impact of the lost tax deductions, but also the significant U. S. deferred tax assets available to us from prior periods, as well as the benefits realized by us and our shareholders from the successful efforts of our senior management team. In balancing these considerations, the Compensation Committee concluded that it would be appropriate to approve payouts in respect of the 2009-2011 grants and earnings for the 2011 performance period in respect of the 2010-2012 and 2011-2013 grants. Without reading this passage we would have assumed that compensation paid under the Executive Performance Plan, which will be reported as non-equity incentive plan compensation, would be fully deductible. A further complication is that payments under both the Management Incentive Plan, which does qualify for the performance-based exception, and the Executive Performance Plan, which does not, are reported in the proxy statement summary compensation table as one number under the non-equity incentive column. And while Goodyear is to be commended for the clarity of its disclosure, most disclosures are not that clear. 3. Executive compensation, 20072010 This section provides an analysis and discussion of executive compensation paid over 20072010. As shown in Table 1 . the sample is the population of U. S. public corporations as included in the Standard amp Poors Capital IQ database and ranges from 8,960 in 2007 to 7,248 in 2010.12 Under current Securities and Exchange Commission regulations, companies are required to report in their proxy statements the compensation of each and every individual who has held either the CEO or CFO title during the year, compensation of the next three highest paid individuals,13 and compensation of up to two additional individuals who would have been among the next three highest paid individuals except that they were no longer employed at the end of the year. Reporting is not required if an individuals compensation is less than 100,000. Turning to the second column of Table 1, we see that the number of executives included in the analysis ranges from 38,824 in 2007 to 28,365 in 2010.14 While Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals, excluding the CFO, Capital IQ and consequently we, include compensation of all executives included in the proxy statement. For executives beyond the CEO and the next three highest paid individuals we assume that compensation is fully deductible. Sample information Copy the code below to embed this chart on your website. Table 2 describes the various components of the compensation package for 20072010, and lists the number of individuals receiving the item in a given year.15 For example, all executives in our sample receive a salary (companies with missing salary data are excluded from the analysis), but not all receive bonuses, and even fewer receive non-equity incentives and other forms of compensation. The mean total compensation was highest in 2007, at just over 1.7 million. The ensuing decrease in average compensation is due to the sharp drop in stock prices, which diminished the value of stock grants. The mean compensation values in this table are lower than those normally observed in the press and most studies for two reasons. The first is that most studies limit themselves to CEO compensation, whereas this study expands the sample to all executives. Because other executives are normally paid less than the CEO, this drives the average down. For example, in 2007 average total compensation for CEOs was 3,468,375, while the average for non-CEOs was 1,191,828. The second reason for lower means is the broader sample of companies used in this study. Most studies limit themselves to the SampP 500 or the SampP 1500 companies as encompassed in Standard amp Poors ExecuComp, whereas this study incorporates those companies and many smaller publicly traded companies. Because compensation tends to increase with firm size, inclusion of these smaller companies reduces our averages. For example, in 2007 the average total compensation for executives in SampP 500 companies was 4,994,819, while the average for other companies was 1,448,167. Mean amounts for executive compensation reported in summary compensation table (dollars number of executives are below mean amounts) Copy the code below to embed this chart on your website. Table 3 aggregates the amounts reported in Table 2 to illustrate the total of executive compensation for all publicly traded companies. Aggregate total compensation decreased from over 66 billion in 2007 to 42 billion in 2010. There are two reasons for this decrease. First, the number of companies/executives incorporated in our analysis decreased in 2010 (as shown in Table 1 and reflecting the decline in the number of publicly traded companies). Second, average compensation (as shown in Table 2) decreased as well. Aggregate amounts for executive compensation reported in summary compensation table (billions of dollars number of executives are below aggregate amounts) Copy the code below to embed this chart on your website. As discussed in Section 2, the year of taxability for equity compensation, i. e. stock grants and stock options, differs from the year of grant. Similarly, the amounts will differ from that reported in the year of grant, as the amount reported in the year of grant will be based upon an expected amount, while that included in the executives income/deducted from the companies8217 taxable income will be based on the actual amount. The amounts reported in tables 2 and 3 are grant date values based upon amounts from the proxy statement summary compensation table. In contrast, the amounts in Table 4 are based upon the vesting date value of stock grants and exercise date profits for stock options, as reported by companies in their proxy statements. Looking at the mean amounts, we are somewhat surprised to see that the number of employees with stock grants vesting (Table 4) is significantly less than the number receiving stock grants (Table 2). A number of potential explanations for this exist, such as stock grants vesting after retirement or stock grants not vesting because restrictions were not met. Unfortunately, the data do not allow us to determine what these reasons are. Similarly, for stock grants the aggregate amount recognized for tax purposes in Table 4 is less than the amount reported in Table 3, although the taxable amounts for stock options are generally greater than that reported in the summary compensation table. Amounts reported for vested shares and exercised options (number of executives are below dollar amounts) Copy the code below to embed this chart on your website. Table 5 focuses on the impact of Section 162(m) on the deductibility of non-performance-based compensation, which is defined as salary, bonus, stock grants, and all other compensation. As noted above, although the bonus is normally performance-based, if it is not paid pursuant to a written plan that meets Internal Revenue Code requirements, it will not qualify for the performance-based exception (and if it were paid pursuant to a written plan, it should be included in the non-equity incentive column). Stock grants with performance conditions have become more common, and therefore may qualify for the Section 162(m) performance-based exception,16 but constitute a minority of those stock grants that vested during the years 2007 through 2010. Consequently we sum these four itemssalary, bonus, stock grants, and all other compensationby individual and treat the first 1 million as deductible. Decomposition of non-performance-based compensation into deductible and nondeductible amounts (billions of dollars) Copy the code below to embed this chart on your website. We shift gears in Table 6 to examine the total deductions associated with executive compensation, performance and non-performance based. On an aggregate basis the deductible components of the compensation package decline from about 39 billion in 2007 to a little less than 28 billion in 2010, with much of the decrease being associated with fewer deductions associated with stock options. In 2010 15 billion of the deductions were based on performance pay, down from roughly 24 billion in 2007. As discussed in the next section, even at these reduced amounts in 2010 there are substantial tax savings for the companies and revenue foregone to the federal government. The Appendix Table provides more detail underlying the aggregates in Table 6 by delineating the total deductions for CEOs and other executives and doing so for large firms (SampP 500) and other firms. Total deductible compensation (billions of dollars) Compensation, taxation, and deductibility: An illustration At this point an illustration comparing the amounts reported in the proxy statement summary compensation table, executives tax return, and corporations tax return might be informative. Consider the 2011 compensation of Paul S. Otellini, president and CEO of Intel. According to the proxy statement summary compensation table, he received total compensation of 17,491,900 for that year. Of that amount, stock awards (7,331,100), option awards (1,802,800), and change in deferred compensation (319,000) are not taxable currently. His taxable income from Intel will include a salary (1,100,000), a bonus (34,000), non-equity incentive plan income (6,429,500), all other compensation (475,500), stock grants that vested during the year (1,319,600), and exercised stock options (132,100). His total taxable income was therefore 9,490,700. The amount currently deductible by Intel includes both non-performance compensation and compensation that qualifies for the performance-based exception. Non-performance compensation includes the salary (1,100,000), bonus (34,000), all other compensation (475,500), and stock grants that vested during the year (1,319,600), for a total of 2,929,100. With the 1 million cap on deductions, Intel forfeits deductions on 1,929,100 of CEO compensation. At the same time, it can deduct for non-performance-based compensation (the maximum allowable at 1 million), non-equity incentive plan income (6,429,500), and the exercised stock options (132,100), for a total deduction of 7,561,600an amount much less than Mr. Otellini8217s 9,490,700 in taxable income. Mr. Otellini and Intel provide a perfect illustration of the aggregate numbers in Table 5. What is most interesting, to this author, about Table 5 is the magnitude of deductions being forfeited by public corporations for the sake of executive compensation. Over the four-year period examined, executives recognized 96 billion in taxable income from the four categories of salary, bonus, vest value of stock grants, and all other compensation, while companies only deducted 55 billion, forfeiting slightly more than 41 billion in potential deductions Hence, one of the problems with Section 162(m), which was adopted ostensibly to reduce excessive, non-performance-based compensation (see U. S. House of Representatives 1993), was that it never touched on compensation directly. Instead, it legislated the deductibility of that compensation and penalized shareholders rather than executives. While corporations have paid lip service to the idea of preserving deductions, empirical research has shown only a marginal effect on executive compensation.17 Overall, however, executive compensation has continued to grow, and with it deductions have been forfeited.18 For example, the number of executives receiving salary in excess of 1 million increased from 563 in 2007 to 594 in 2010, and the number of executives receiving non-performance-based compensation in excess of 1 million increased from 3,379 in 2007 to 4,729 in 2010. This is despite a substantial decrease in the number of executives covered from 2007 to 2010 (see Table 1). Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions. Consider Apple Inc. Duhigg and Kocieniewski (2012) detail how Apple avoids billions in taxes by setting up subsidiaries in low-tax jurisdictions. Yet when Apple made Tim Cook their CEO in August 2011, they gave him one million shares of restricted stock that vested purely with the passage of time, which therefore is not performance-based. Consequently, this grant, valued at 378 million at the time it was made, would not meet the performance-based exception of Section 162(m) and therefore would not be deductiblecosting shareholders more than 100 million in additional taxes 4. Tax benefits to corporations As noted above, compensation is normally deductible as an ordinary business expense under Section 162 of the Internal Revenue Code. This benefit can be large for the corporation and costly for the federal Treasury,19 as the corporate tax rate is 15 percent for taxable incomes under 50,000, 25 percent for those between 50,000 and 75,000, 34 percent for those between 75,000 and 100,000, 39 percent for those between 100,000 and 333,333, and 34 percent for taxable incomes between 333,333 and 10 million.20 Above 10 million, the rate increases to 35 percent (except between 15,000,000 and 18,333,333, where the tax rate is 38 percent). A reasonable assumption is that most public corporations have taxable incomes in excess of 100,000, so their tax rate would either be 34 or 35 percent. For a number of reasons, such as tax deductions and credits, even large public corporations may pay taxes at a lower rate, or not at allthus the tax benefit of executive compensation can be overstated. An example is Whirlpool Corporation, which, due to tax credits, did not pay taxes in 2010 and 2011. Whirlpool is not alone in this regard (for example, see the Goodyear excerpt above). So the question becomes: What is the value of the tax deductions associated with executive compensation to companies like Whirlpool Note that if the corporation has a tax loss, as in the case of Whirlpool, it can use that loss to claim a refund on taxes paid in the previous two years or to shelter taxable income earned in the following 20 years. In theory, even if the company does not have any current taxable income, a 1 additional deduction will either increase this year8217s tax refund by 35 cents, or reduce future taxes by 35 cents. But in practice, sometimes a company cant claim the carryback because it hasnt paid federal taxes in the past two years, and the existence of taxable income in the future may be uncertain as well. If so, how do we estimate the benefits of these deductions Academic researchers answer this question by estimating marginal tax rates, the rate of tax/benefit associated with the next dollar of income/deduction. Professor John Graham of Duke University, who has done extensive research in the area (see Graham 1996), provides estimates of these rates on his website, faculty. fuqua. duke. edu/ jgraham/taxform. Unfortunately, he does not provide tax rates for all companies in the Capital IQ data set. But for the approximately 25 percent of observations for which he does provide tax rates, the rates he provides are substantially lower than 35 percent, as the mean of his rates is slightly below 13 percent. As an alternative, in another paper (Graham and Mills 2008) he provides a fairly simple and less data-intensive method of calculating marginal tax rates. Using that algorithm still results in a sample reduction of about 30 percent, but perhaps a more realistic average tax rate of 25 percent. However, both rates are calculated after the impact of executive compensation, and Graham, Lang, and Shackelford (2004), among others, document that the stock-option deduction can significantly decrease marginal tax rates. So when calculating the average tax benefit of the executive compensation deductions, the relevant tax rate to use is something lower than 35 percent, yet is somewhat higher, perhaps significantly higher, than 13 or 25 percent. For this reason, Table 7 provides estimates using three alternative rates15, 25, and 35 percentwhile the following discussion uses what is probably the most realistic estimate, 25 percent. Estimated tax savings/revenue loss as a result of executive compensation (billions of dollars) Table 7 provides some boundaries for the aggregate tax savings to companies and costs to the Treasury using effective tax rates of 15, 25, and 35 percent. Using the 15 percent rate provides the lower bound on our estimate of the tax savings, which ranges from about 3.5 billion in 2009 to just under 6 billion in 2007. In contrast, using the 35 percent statutory federal rate provides an upper bound on our estimate of the aggregate tax benefits/cost to the U. S. Treasury, which ranges from about 13.7 billion in 2007 to 8.3 billion in 2009. If we assume a conservatively estimated 25 percent marginal tax rate, then revenue lost to the federal government in 2010 from deductible executive compensation was about 7 billion, and the total amount lost over the 20072010 period was 30.4 billion. 5. Looking back and forward While the data provided in this study do show a moderating of executive compensation over the study period 20072010, over a longer period it is well known that executive, in particular CEO, compensation has increased at rates far in excess of inflation and the wage growth of rank-and-file individuals. So the question exists: Is the moderating trend observed over the recent past a new paradigm, or is it merely one of the outcomes of the countrys severe financial crisis In terms of a new paradigm, 2010 marked a once-in-a-lifetime opportunity for shareholder empowerment. That July, the Dodd-Frank banking bill imposed the long-awaited say-on-pay on American corporations, which took effect with annual meetings on or after January 21, 2011. This provision, which was widely opposed by the business community, requires that publicly traded corporations provide their shareholders with a non-binding vote on their executive compensation at least once every three years. While the vote is (1) after the fact, i. e. shareholders are voting to approve compensation provided in the previous year, and (2) advisory, the possibility does exist that the board will moderate compensation to avoid being embarrassed by a negative outcome.21 In fact, Lucien Bebchuk of Harvard University notes in several of his papers that shame is perhaps the only constraint on executive compensation. Academic research in the United Kingdom, where say-on-pay has been in effect since 2002, and in the United States, by this author, suggests that say-on-pay can have a restraining impact on executive compensation under certain circumstances. Another provision of the Dodd-Frank banking bill, which has not yet been implemented by the Securities and Exchange Commission, is the requirement that companies disclose the ratio of CEO compensation to that of the companys median employee. This disclosure, which has been opposed by companies, also has the potential to embarrass corporate boards and CEOs, and if put into place, has the potential to restrain executive compensation.22 But looking back, a reasonable question might be whether mandatory disclosure and tax penalties have worked to restrain compensation. In this authors lifetime, the first big change in proxy statement disclosure was made in 1993. This disclosure, which dramatically increased the amount disclosed, inadvertently led to increased compensation, as executives at one company were able to more clearly assess what executives at their competitors were making. Section 280(g) of the Internal Revenue Code caused companies to forfeit deductions and imposed penalties on the recipient, if change-in-control payments (i. e. golden parachutes) were higher than allowed by the section. This Internal Revenue Code section did little, if anything, to curtail those payments, as companies without change-in-control payments added them, while those with change-in-control payments in excess of that allowed added the now-infamous tax gross-ups, whereby the shareholders would provide additional compensation to pay the executives tax penalty as well as the tax on that additional compensation. The same holds true for Section 162(m). Harris and Livingstone (2002) suggest that inadvertently, Section 162(m) may have encouraged increases in cash compensation for executives earning less than 1 million. Balsam and Ryan (2008) find that Section 162(m) resulted in increases in stock option compensation for executives earning more than 1 million in cash compensation. And although stock options were in favor amongst the political class when Section 162(m) was adopted, by the time the 21st century rolled around, the shine had worn off. In discussing the effect of Section 162(m) on the increased use of stock options, a 2006 Wall Street Journal article (Maremont and Forelle 2006) quoted Christopher Cox, the then-chairman of the Securities and Exchange Commission, as saying it deserves a place in the museum of unintended consequences. The belief of this author is that executive compensation will recover in the near future, exceeding levels seen in 2007. Some of that increase will be in the form of deductible performance-based compensation, but the level of non-performance-based compensation will increase as well. EPI would like to thank the Stephen Silberstein Foundation for supporting its work on executive compensation. Steven Balsam is Professor of Accounting and Senior Merves Research Fellow at the Fox School of Business at Temple University. He has written several books on executive compensation including Executive Compensation: An Introduction to Practice and Theory , as well as published in the top academic and practitioner journals in accounting. Professor Balsam is also a member of the editorial boards of the Journal of Accounting and Public Policy and The International Journal of Accounting . He has been widely quoted in the media and has given expert witness testimony on executive compensation to the U. S. Senate Committee on Finance. Endnotes 1. Covered individuals were originally defined as the chief executive officer plus the next four highest paid executive officers, as disclosed in the corporate proxy statement. However, in late 2006 the Securities and Exchange Commission changed the proxy statement disclosure requirements, so that corporations had to disclose compensation for the chief executive officer, chief financial officer, and next three highest paid executive officers. Since Section 162(m) does not specify the chief financial officer, covered individuals are now the chief executive officer plus the next three highest paid executive officers. 2. A change in control payment, also known as a golden parachute, is a payment to an executive that occurs when his or her company experiences a change in ownership. 3. For purposes of proxy statement reporting, awards pursuant to a written plan have been incorporated under the heading of non-equity incentive plan compensation since the end of 2006. It is common to combine the two categories of bonus and non-equity incentive plan compensation for other purposes. 4. This may not always be the case even when there is a written plan, the plan may not meet Section 162(m) requirements. In a private letter ruling (www. irs. gov/pub/irs-wd/0804004.pdf) the IRS informed the company in question that compensation paid under its incentive plan would not qualify as performance-based, because the plan allowed for payments in the event of termination regardless of whether the performance conditions were met. 5. When the compensation is earned over a multiple year period, e. g. a two - or three-year performance period, the deduction would be taken in the last year of the period. 6. Sometimes rather than granting shares, companies grant units, which are then turned into shares upon vesting. 7. In most cases, meeting performance conditions is not a yes/no proposition. Typically, the percentage of shares that vest vary based upon performance, with a lesser number of shares vesting if performance meets the pre-established minimum threshold, the full grant vesting if performance meets the pre-established target, and possibly additional shares being earned if performance exceeds the target, up to a maximum that is usually defined as 200 percent of the original grant. 8. Normally a stock grant is not taxable to the recipient or deductible by the grantor until the restrictions expire. However, under tax code Section 83(b) the recipient may elect to have the grant taxed at the time of grant. Discussions with practitioners confirm these elections are rare in public companies. 9. Companies do not always clearly disclose whether their compensation qualifies as performance-based, nor do they disclose the amounts of deductions forfeited. 10. This discussion ignores Section 422 (tax-qualified or incentive) stock options. A Section 422 stock option provides benefits to its holder, as the tax event is not exercised, but rather the later sale of the shares is acquired upon exercise. Further, if certain conditions are met (for example, the shares are held from two years from the date of grant to one year from the date of exercise), the income is taxed as a capital gain and not ordinary income. While these options are beneficial to their holder, they are costly to the company, because if the holder meets the conditions for capital gain treatment, the company does not receive any tax deduction. However, because these options are limited to 100,000 in nominal value vesting per year and are considered tax-preference items at the time of exercise for purposes of the alternative minimum tax, they are not very useful (or used) in executive compensation. Thus we can safely ignore them in our discussion. 11. While pensions and deferred compensation need to be recognized as financial accounting expenses and disclosed in proxy statements in the year earned, for tax purposes they receive deferred recognition. Consequently, if deferred until the executive is no longer covered by Section 162(m) (e. g. post-retirement), they will be fully deductible for tax purposes. 12. This decrease is consistent with the decrease in publicly traded companies as documented in Stuart (2011). See www. cfo/article. cfm/14563859. 13. Since 2007, the Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals. 14. In theory, each company should have a CEO, but not all companies identify an individual as such in their filings. Consequently, the number of CEOs is slightly less than the number of companies in each year. 15. Capital IQ collects and we analyze the values as reported by companies in their proxy statements. 16. But do not have to, as illustrated by the excerpt from the Intel proxy statement above. 17. For example, Balsam and Ryan (2007) show that Section 162(m) increased the performance sensitivity of bonus payments for CEOs hired post-1994. 18. For more discussion on the forfeiture of deductions, see Balsam and Yin (2005). 19. This analysis only incorporates federal taxes. Incorporating state income taxes would increase the benefit associated with compensation deductions. 20. The 39 percent tax rate is intended to remove the benefits associated with the 15 percent and 25 percent rates. 21. In the first two years of say-on-pay, more than 98 percent of companies have had their executive compensation approved by shareholders, with the typical firm receiving a positive vote in excess of 80 percent. However, some well-known companies have had their executive compensation rejected by shareholders, including Hewlett-Packard in 2011 and Citigroup in 2012. 22. While the disclosure only applies to CEO compensation, compensation of other executives is often tied to that of the CEO. References Balsam, Steven, and David Ryan. 2007. Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m). Journal of Accounting, Auditing and Finance . vol. 22, no. 4, pp. 599621. Balsam, Steven, and David Ryan. 2008. The Effect of Internal Revenue Code Section 162(m) on the Issuance of Stock Options. Advances in Taxation . vol. 18, pp. 328. Balsam, Steven, and Qin Jennifer Yin. 2005. Explaining Firm Willingness to Forfeit Tax Deductions under Internal Revenue Code Section 162(m): The Million-dollar Cap. Journal of Accounting and Public Policy . vol. 24, no. 4, pp. 300324. Capital IQ Database. 2012. Standard and Poors Financial Services LLC. www. capitaliq/home. aspx Duhigg, Charles, and David Kocieniewski. 2012. How Apple Sidesteps Billions in Taxes. New York Times , April 28. www. nytimes/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations Graham, John R. 1996. Proxies for the Corporate Marginal Tax Rate. Journal of Financial Economics . vol. 42, no. 2, pp. 187221. Grassley, Chuck. 2006. Executive Compensation: Backdating to the Future/Oversight of Current Issues Regarding Executive Compensation Including Backdating of Stock Options and Tax Treatment of Executive Compensation, Retirement and Benefits. Closing statement of Senator Chuck Grassley at a hearing of the U. S. Senate Finance Committee, September 6. www. finance. senate. gov/imo/media/doc/090606cga. pdf Graham, John R. Mark Lang, and Doug Shackelford. 2004. Employee Stock Options, Corporate Taxes, and Debt Policy. Journal of Finance . vol. 59, no. 4, pp. 15851618. Graham, John R. and Lillian Mills. 2008. Simulating Marginal Tax Rates Using Tax Return Data. Journal of Accounting and Economics . vol. 46, no. 23, pp. 366388. Harris, David, and Jane Livingstone. 2002. Federal Tax Legislation as a Political Cost Benchmark. The Accounting Review . vol. 77 (October), pp. 9971018. Maremont, Mark, and Charles Forelle. 2006. Bosses8217 Pay: How Stock Options Became Part of the Problem 8211 Once Seen as a Reform, They Grew Into Font of Riches And System to Be Gamed Reload, Reprice, Backdate. The Wall Street Journal, December 27. online. wsj/article/SB116718927302760228-search Stuart, Alix. 2011. Missing: Public Companies: Why Is the Number of Publicly Traded Companies in the U. S. Declining CFO, March 22. www. cfo/article. cfm/14563859 U. S. House of Representatives. 1993. Fiscal Year Budget Reconciliation Recommendations of the Committee on Ways and Means. U. S. Government Printing Office. Appendix Table 1 EPI is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. 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