Friday, June 25, 2010
Periodically over the years, the subject of executive compensation is raised as to whether or not exe pay is out of line with other forms and levels of pay. Usually the topic surfaces along with headlines proclaiming that Joe Smith was awarded a multi-million bonus, severance package, stock option or retirement plan. Often in the same article is an announcement that some factory is being closed and production work is being sent offshore to be performed by some third world minion at one quarter of the wage rate of a laid off US worker. When questioned as to the appropriateness of the executive’s compensation, a not too articulate spokesperson responds with something about an agreement made several years ago, when economic times were better.
There are a number of restrictions in place, under two statutes, (10 U.S.C. 2324(e)(1)(p) and 41 U.S.C. 256(e)(1)(p)), the Federal Office of Management and Budget, Office of Federal Procurement Policy, Cost Accounting Standards Board caps senior executive compensation for Federal contractors at $693,951 for 2010. This does not outright prevent a government contractor from paying senior executives more, but it does limit how much of the executive’s compensation ($693,951, 2010) the contractor can charge back to the US Government.
In addition, certain employees within organizations may be classified by the Internal Revenue Service as either “Highly Compensated Employees” and/or “Key Employees”. These two classes of employees often are limited in their ability to participate in the organization’s retirement plans. The American Jobs Creation Act of 2004, Pub. Law No. 108-357, 118 Stat. 1418, added § 409A to the Internal Revenue Code (Internal Revenue Bulletin: 2005-2) and provides that amounts deferred pay under a non-qualified deferred compensation plan has to meet certain requirements or it becomes taxable income for the executive. Provided that the employing organization meets these requirements of § 409A, the organization and/or the employee is allowed to legally contribute to these plans up to and/or beyond certain IRS limits.
Internal Revenue Service Code Section 162(m)(1) limits publicly held corporations to compensation of $1,000,000 as a tax deduction for “ordinary and necessary expenses”. Once again, this does not mean that an organization cannot pay more; but it will not be allowed a tax deduction for “ordinary and necessary expenses” for amounts above $1,000,000.
The Securities and Exchange Commission (http://www.sec.gov/) requires publicly held companies to report the compensation of their top officers and certain other positions. Pay for the organization’s top exec’s may be found in one of several official filing documents, including (1) the company's annual proxy statement; (2) the company's annual report on Form 10-K; (3) registration statements filed by the company to register securities for sale to the public; and (4) the company’s current report on Form 8-K. Going to the SEC’s website and accessing the EDGAR System and looking up GM (General Motors Co, CIK=0001467858) you will find the various required filings by GM for 2010. Opening the link to Annual report [Section 13 and 15(d), not S-K Item 405], dated 2010-04-07, you will find the “EMPLOYMENT AGREEMENT FOR KENNETH W. COLE”, document name: dex1015.htm. Opening that document (it is considered a “public” document) will display the compensation and employment agreement for one Ken W. Cole.
We see who restricts executive compensation, tomorrow we will see who controls executive compensation?
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