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TAX FACTS: Executive Pay In US Democrats’ Crosshairs January 18, 2007

Posted by notapundit in Congress, Politics, US News.

WASHINGTON (Dow Jones)–U.S. Democrats, in control of Congress for less than a month, are pushing a far-ranging change to limit the deferred tax benefits of certain executive compensation packages.

The Senate Finance Committee by a unanimous voice vote passed a bill on Wednesday to cap annual deferral to $1 million per year of an individual’s “nonqualified deferred compensation” arrangement.

The proposal contains teeth. Deferral of bonuses or other income above the $1 million cap would mean the executive would face immediate taxation on that excess amount, as well as a 20% penalty.

Birgit Anne Waidmann, an executive compensation specialist with PricewaterhouseCoopers LLP in Washington, said such a proposal “could have a pretty broad reach” and affect numerous companies.

The plan targets “nonqualified deferred compensation” arrangements to spread out bonuses and executive pay over a series of years. Companies use these plans to award cash or securities to executives, who are paid out over time to minimize a tax hit.

The move comes amid congressional criticism of large executive pay packages, such as those for outgoing chief executives Henry A. McKinnell of Pfizer Inc. (PFE) and Robert Nardelli of Home Depot Inc. (HD).

“We’re trying to be fair,” said Senate Finance Committee Chairman Max Baucus, D-Mont.

One executive pay expert, Elizabeth Drigotas of Deloitte & Touche LLP, warned such restrictions could prompt companies to pay current compensation in the form of cash or greater grants of stock options or performance bonuses.

“I personally think they need to be very careful with that kind of limit because they are going to see some unintended consequences,” Drigotas said.

Baucus’s bill, co-sponsored by U.S. Sen. Charles Grassley, R-Iowa, is part of an $8 billion small businesses tax relief bill designed to offset the cost of a boost in the federal minimum wage. The bill is expected to reach the Senate floor as early as next week. The House minimum wage bill doesn’t contain tax measures, and so timing of final action on the bill is unclear.

Baucus told reporters that despite House Democrats’ opposition, the tax cuts are essential for final Senate approval of the minimum wage bill.

This would be the second significant change involving executive pay since a 2004 tax law passed Congress that sought to clamp down on executive pay abuses from the Enron Corp. (ENE) scandal. That 2004 law included a 20% tax penalty on executives who accelerate payments from “nonqualified deferred compensation” plans, designed to punish those who cashed out of such plans early.

The Baucus-Grassley bill would cap the deferral at $1 million, or the average taxable compensation for the previous five years. It also would expand the definition executives subject to such limits. The expanded definition of a “covered employee” would include the chief executive officer at any time during the last year, the four highest-paid officers and any executive who previously ranked as a “covered employee” or one of the top paid executives.

The restrictions would take effect for amounts deferred in taxable years beginning after Dec. 31, 2006. It would would raise $806 million in revenue over 10 years, according to Congress’s Joint Committee on Taxation.

By Rob Wells, Dow Jones Newswires


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