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Deferred Compensation and Stock Options This article is based on a talk which the author gave before the 1962 University of Pennsylvania Tax Conference. It appeared in substantially the same form in TAXES—The Tax Magazine, January 1963. Mr. Scully cautions the reader that the President has asked congress to exact legislation which would substantially affect advantages of restricted stock options to employees. (CONSIDER FOR A FEW MINUTES, if you will, that you are a member of the Board of Directors of a medium-sized corporation. In such capacity you are confronted with the following problem. John Jones, one of the company's key executives, is currently earning $40,000 a year base salary, plus a bonus computed on a percentage of net income which has varied between $1,000 and $9,000 over the last five years. Although John has earned a good salary for the last ten years, he can look forward to retiring in 15 years with post-retirement income of only $12,000 a year. Ten thousand dollars a year of this $12,000 annual post-retirment income will come from a company-sponsored qualified pension plan. The Board of Directors has decided that if they are to retain the services of J o h n Jones until retirement they must increase his compensation. You, as a member of the Board of Directors, have been asked to investigate two of the possible ways in which this increase in compensation may be granted to John. The two methods are a nonqualified deferred compensation plan1 and a stock option plan.2 Both of these plans are to be investigated with a view toward increasing John's aftertax earnings, assisting him in creating an estate, and at the same time enabling the corporation to claim a deduction for amounts paid. Your knowledge of the company's qualified deferred compensation plan reveals 16 that John's benefits under the plan cannot be substantially increased without, at the same time, increasing the benefits to all other employees covered by the plan. This would be too costly to the company and is not to be considered. Therefore, if a deferred compensation plan is to be utilized, it will of necessity be a nonqualified plan. A nonqualified plan may have one of several objectives. It may attempt to defer part of John's current earnings and spread them over a period of years while he is still employed, or it may defer current income until after his retirement. The first of these two objectives is incorporated into many executive profit-sharing plans. Under such plans an executive's bonus is computed based on current income of the corporation, but only a fraction is paid out in the current year. T h e remainder is prorated over the subsequent three to five years and generally is payable only if the executive is still employed by the corporation. This type of profit-sharing plan would serve a dual purpose in John's case. Increases in his compensation would be geared to increases in profits of the corporation. The corporation would obtain a deduction as the amounts were actually paid3 and John would pick them up as income only in the years they were actually received. Spreading the payments over a period of years would be of a further advantage to John in that his earnings from one year to the next would tend to be level from one year to the 1 IRC Sec. 404(a)(5). 2 IRC Sec. 421. 3 See footnote 1 and Reg. 1.404(a)-12. THE QUARTERLY
Object Description
Title |
Deferred compensation and stock options |
Author |
Scully, Lawrence J. |
Subject |
Stock options Deferred compensation |
Personal Name |
Scully, Lawrence J. |
Portrait |
Scully, Lawrence J. |
Office/Department |
Touche, Ross, Bailey & Smart. Philadelphia Office |
Citation |
Quarterly, Vol. 09, no. 1 (1963, March), p. 16-21 |
Date-Issued | 1963 |
Source | Originally published by: Touche, Ross, Bailey & Smart |
Rights | Original copyright held by CCH; copyright not renewed |
Type | Text |
Format | PDF image with OCR under text, scanned at 400dpi |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi. Digital Accounting Collection |
Date-Digitally Created | 2009 |
Language | eng |
Identifier | Quarterly_1963_March-p16-21 |