The efficiency of executive compensation for shareholders is something that boards of directors and companies strive to achieve by maximizing their tax deductibility. The tax code (Internal Revenue Code) includes several provisions that apply to executive compensation such as Tax Code §162(m) – Deductibility of Executive Compensation and Tax Code §409A – Deferred Compensation & SERPS (Feller and Schanz 500). Executive compensation is subject to various tax treatments developed to meet several challenging policy concerns and goals. The goals range from promoting performance-based compensation and other forms to encouraging the success of new businesses to discourage remuneration in excess of particular amounts.
Executives are mostly compensated in the form of equity: typically, it is company stock or a derivative form of company stock. Equity compensation is considered to be a powerful incentive because it is grounded in the relationship between the value of the award and the company’s stock price performance (Wilde and Wilson 71). An increase in the value of the company leads to better stock price performance. Aware of this association, executives are encouraged to make an effort and increase the company’s success. There are three main types of equity used for executive compensation: stock options, restricted stock, and performance shares.
Tax planning for executives is seen as a part of tax risk management. In order to mitigate risks, a company might want to devise go-to solutions and procedures. First of all, tax planning for executive compensation needs to include accurate and timely disclosure in correspondence and returns (Wilde and Wilson 70). Companies need to make sure to provide a timely response to queries and information requests. If an issue is to occur, it should be resolved in a timely manner. Lastly, tax risk management for executive compensation implies openness and transparency with regard to decision-making, governance, and tax planning.
References
Feller, Anna, and Deborah Schanz. “The Three Hurdles of Tax Planning: How Business Context, Aims of Tax Planning, and Tax Manager Power Affect Tax Expense.” Contemporary Accounting Research, vol. 34, no. 1, 2017, pp. 494-524.
Wilde, Jaron H., and Ryan J. Wilson. “Perspectives on Corporate Tax Planning: Observations from the Past Decade.” The Journal of the American Taxation Association, vol. 40, no. 2, 2018, pp. 63-81.