1. MBAO 6600 - Executive Compensation Executive Salaries: Tax Issues Highly Paid Employees (IRS Definition): One or more of the following satisfy the definition: 1. Earns > $50K/year & salary in top 20% of all employees 2. Earns > $75K/year 3. Owns > 2% of the firm equity Highly paid employee status impacts: -Qualified benefit plan status and size of contribution -Opportunity to take unpaid leave under FMLA

2. MBAO 6600 - Executive Compensation Executive Salaries: Forms of Taxes Ordinary Income Tax Rate Joint Income Single Income 15% 0-$42K 0-$25K 28% $42K-$102K $25K-$61K 31% $102K-$156K $61K-$128K 36% $156K-$278K $128K-$278K 39.6% over $278K over $278K

3. MBAO 6600 - Executive Compensation Executive Salaries: Forms of Taxes Capital Gains Tax - Gains realized on sale of capital assets (such as stock) Short-term capital gains (less than 12 months) – ordinary income tax rates (up to 39.6%) Long-term capital gains (more than 12 months) – 20% tax rate

4. MBAO 6600 - Executive Compensation Executive Salaries: IRC ruling Million Dollar Cap on Executive Salaries: Section 162 (m) of IRC No Corporate Tax deduction for annual compensation that exceeds $1 million Applies to publicly held companies - CEO & next 4 highly compensation employees. Exceptions: Stock options: shareholder approved, admin. by comp. committee > 2 independent people Performance-based pay: same as stock options & performance formula for determining award

5. MBAO 6600 - Executive Compensation Executive Salaries: Determinants (Gomez-Mejia & Balkin, 1992) Size of Firm Stage in Life Cycle –Start-up, Growth, Mature, Decline Industry/Sector –Service/Mfg./High Tech –private/public/non-profit Firm Performance - weak w.r.t. salaries

6. MBAO 6600 - Executive Compensation Significance of Executive Salary Salary represents the most stable source of income for the executive Salary is a benchmark to determine pay mix: –Pay Mix = variable/fixed pay Represents degree of risk & uncertainty in earnings –PM too small - executive is too “comfortable” with earnings not motivated to take risks –PM too large - executive is too much at risk, and overly focused or distracted by pay.

7. MBAO 6600 - Executive Compensation Significance of Executive Salary Salary is the basis of other executive pay decisions 1. Design of bonus is a percentage of salary 2. Golden parachute (executive severance pay) is a multiple of the salary 3. Executive retirement plan uses salary in the formula for retirement income. 4. Executive life and disability insurance uses salary as a basis for computing the benefit to survivors.