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Chapter Six Attracting and Motivating Employees and Managers: Company and Employee Tax Planning

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Executive Compensation ... Another limit on executive compensation is the ... If the firm or executive expects a tax change status, they can negotiate the ... – PowerPoint PPT presentation

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Title: Chapter Six Attracting and Motivating Employees and Managers: Company and Employee Tax Planning


1
Chapter SixAttracting and Motivating Employees
and Managers Company and Employee Tax Planning
Strategic Tax Planning
2
Introduction
  • Goals of compensation To improve labor
    productivity over that derived from simply paying
    wages.
  • Two Fundamental Approaches
  • Better matching rewards with employee needs
  • Align employee performance with the firms
    strategic goals

3
Executive Compensation
  • Firms need to compete by offering better
    compensation match to combat the scarcity of good
    corporate executives.
  • Average large company CEO receives 20 million in
    annual compensation.

4
Six basic components
  • Annual base wages
  • Year-end bonuses
  • Long-term equity participation
  • Deferred compensation
  • Enhanced retirement and other fringe benefits
  • Employment security

5
Executive Compensation
  • Each component taxed differently
  • Salary should not be used for direct motivator
    for future performance.
  • Equity compensation is more preferred.
  • Stock options carry a strong incentive effect.

6
Nonexecutive Employee Compensation
  • Nonemployees are considered contract labor where
    tax treatment needs to be distinguished.
  • Typically deductible just like employee
    compensation.
  • More employment tax savings might be obtained by
    having workers classify as self-employed
    contractors instead of employees.
  • Considered employees if they have right of
    control.

7
Nonexecutive Employee Compensation
  • Attempting to classify employees as contractors
    may be a poor tax strategy.
  • Firm pays less in direct taxes however pay more
    in implicit taxes.
  • Employee Leasing can reduce employment and
    transaction costs by having the firm pay only
    leasing fees to the leasing firm.

8
Nonexecutive Employee Compensation
  • Controlling the unemployment tax rate can also
    reduce costs.
  • Reducing employee dismissals can reduce the
    unemployment claims for the firm.
  • In nonexecutive compensation, firms can reduce
    taxes if they take advantage of tax breaks
    relating to hiring new employees.

9
Nonexecutive Employee Compensation
  • Employee Compensation Packages
  • Firms indifferent to different compensation types
    because firms get tax deductions regardless of
    the form of compensation.
  • Noncash benefits available to all employees are
    not taxed to the employee.
  • Depending on the employees tax rate, stock
    options or after tax benefits may be preferred.

10
Perquisites
  • Nature of the firm determines its labor-capital
    intensity.
  • There are transaction costs associated with
    noncash compensation such as pension plans and
    medical plans.
  • Benefits used can have attract and motivate
    employees.

11
Pension and Profit Sharing Plans
  • Pension plans can be defined benefit or defined
    contribution.
  • In a defined contribution plan, employer makes
    annual contribution to a trust account setup for
    the benefit of the employee.
  • Returns in a pension trust is not taxed and
    managed by financial institutes or financial
    intermediaries.

12
Pension and Profit Sharing Plans
  • Pension funds can be invested in the companys
    own stock.
  • Reduces number of share publicly held for the
    company.
  • Motivates employee to work harder.
  • Profit-sharing are structured to pay employees a
    percentage of earnings each year

13
Current and Deferred Compensation
  • 401k allows employee to set aside pre-tax dollars
    into a retirement-type account.
  • Earnings are untaxed until they are withdrawn.
  • Maximum contribution per year

14
Limits on Deductibility on Executive Compensation
  • Executive Compensation comes in three forms.
  • Salary
  • Bonus
  • Stock Options
  • Publicly held corporations are denied deductions
    for the amount by which executives annual
    compensation exceeds 1,000,000, unless
    performanced based.

15
Limits on Deductibility on Executive Compensation
  • Another limit on executive compensation is the
    limited deductibility of golden parachute
    payments.
  • Executives enter agreement is takeover occurs, a
    large amount of money must be paid to them.
  • Profit for executive comes from the sale of stock.

16
Limits on Deductibility on Executive Compensation
  • Incentive Stock Option Plan are more tax
    beneficial to the executive but can be subjected
    to alternative minimum tax if exercise price and
    stocks fair market value is far apart.
  • Stock Options keeps the firm keep control of the
    company from outsiders.

17
Management Bonus Plans
  • Bonus plans for executives are tied into
    financial accounting performance measures.
  • Bonus Plans encourage short-run payoff projects
    and encourage managers to manipulate accounting
    information to increase earnings.
  • Bonuses can be taxed as ordinary income.

18
Management Bonus Plans
  • If the firm or executive expects a tax change
    status, they can negotiate the timing of the
    bonus.

19
Financial-Statement/Finance Versus Tax Strategy
Trade-Offs
  • Tax Savings from compensations are reported as
    additional cash on the balance sheet and reduced
    income tax expense on the income statement.
  • Employers should be concerned about the timing
    and the amount of income tax deduction and
    relevant cash requirements.

20
Financial-Statement/Finance Versus Tax Strategy
Trade-Offs
  • Opportunity to obtain capital gain rates via
    stock option programs is a motivator for
    compensation.
  • Employee will view deferral of compensation as a
    benefit when paid a reasonable salary and bonus.
  • Employer will have affinity to nonqualified stock
    option due to favorable financial statement
    treatment and income tax deductions.

21
SAVANT Framework
  • Case You are trying to hire top executive away
    and would bring in 5 million to the company.
    Your firm has a tax NOL which is expiring.
    Current compensation at the competitor firm is 1
    million in salary. What sort of contract should
    be offered?

22
SAVANT Framework
  • Strategy
  • Hiring executive away from competitors keeps a
    strategic advantage.
  • Anticipation
  • Assure that stock value will go up in response to
    performance.
  • Value-Adding
  • Financial-accounting charge to earnings should
    not exceed 5 million per year
  • Negotiating
  • Company would prefer to defer more compensation
    till next year thus have to pay the executive
    more. Stock options is no viable also because she
    may not see any tax advantage.
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