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A gross tax is additional compensation paid to cover an employee’s tax liability for benefits received, with approximately 77% of large US corporations offering it. The tax increase is the most commonly used benefit, but it is controversial due to criticism of excessive executive pay packages. The SEC issued new regulations in 2006 to increase disclosure requirements for benefits exceeding $25,000 or constituting 10% of total benefits for an employee.
A gross tax, or simply gross, is compensation paid to an employee, in addition to his salary, to cover the tax liability for benefits or “benefits.” Requirements may include the use of a corporate car or plane, relocation expenses, leases, memberships, and insurance. Because the IRS treats benefits as other income, employees who receive benefits must pay taxes on the fair market value of the goods or services received.
Of the large corporations in the United States, approximately 77 percent offer gross profit or tax refunds. For example, in 2004, Home Depot gave outgoing CEO Robert Nardelli an additional $3.3 million to take care of his personal taxes on various requirements. In Nardelli’s case, this included forgiveness of a personal debt and a family trip on the corporate plane.
Beginning in the 1980s, tax increases increased after the United States Congress imposed a 20 percent excise tax, in addition to regular income tax, on severance packages for executives who merged or sold their companies. The special tax is applied when the compensation exceeds an amount that is three times the average earnings of the executive in the last five years. Standard severance packages are typically three times salary and bonus, and outstanding restricted stock and options vest immediately, making the potential tax bill extremely expensive. Businesses can end up paying millions in gross taxes to the IRS to provide employees with just a few hundred thousand dollars in additional severance pay. A tax increase can be the most expensive part of a golden parachute for the company.
Proponents of tax levies argue that the tax refund is an effective mechanism for recruiting, hiring, and retaining experienced executives. Another advantage is that executives can have larger equity stakes in their companies if they don’t have to pay restricted stock taxes. Executives who have raised capital will likely align their management goals with those of shareholders. Opponents of the tax increases suggest that companies use the tool to bolster executive compensation while hiding this fact from shareholders. Expensive tax collection can be an inefficient use of shareholder money.
Prior to 2006, the requirements had to be included in the Summary Compensation Table of the annual proxy statement only if the total value of the requirement exceeded 10 percent of the employee’s total annual salary and bonus or $50,000 USD. In addition, the specific details of a gross tax take, or any other benefit, had to be outlined in a separate summary only if it exceeded 25 percent of the total benefits for that employee. After the financial catastrophes at Tyco, WorldCom, and Enron, the SEC issued new regulations, “Executive Compensation and Related Party Disclosure,” that applied to proxy statements filed after December 15, 2006. The disclosure threshold was lowered from $50,000 USD to $10,000 USD for aggregate requirements with detailed disclosure required for any benefit that exceeds $25,000 USD or constitutes 10 percent of total benefits for an employee.
Using data from proxy statements of Fortune 500 companies, the tax increase is the most commonly used requirement. Of the 2006 proxy returns, 755 executives accepted gross tax increases, with a median gross increase of approximately $34,000 USD. Although the tax refund is the most commonly used benefit, it is not the most exorbitant. For example, during 2006, Fortune 500 companies provided the use of aircraft or corporate jets as a benefit to 432 executives, with an average benefit value of $82,203 USD. However, criticism from shareholders and the media about excessive executive pay packages, including bonuses and benefits, have made the implementation of tax levies a controversial issue.
Smart Asset.
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