Academic journal article Journal of Accountancy

Tax Gross-Ups Make Parachutes More Golden

Academic journal article Journal of Accountancy

Tax Gross-Ups Make Parachutes More Golden

Article excerpt

The battle to retain talent in a tight labor market and the consolidation trend that continues in many sectors of the economy are responsible for the popularity of "golden parachute" provisions for top executives.

A study of 350 corporations revealed that 64% of them provided financial protection for one or more key executives in 1997 in the event there was a change in company control. Golden parachutes, however, have significant tax implications for both the company and the executive.

If a parachute payment exceeds a certain threshold, the executive who receives the payment is subject to a 20% excise tax in addition to his or her regular income tax. Also, the portion of the parachute payment above the threshold amount is not deductible by the company as compensation to the employee.

Companies have several alternatives when it comes to providing the payments and dealing with the taxes thus generated, said Howard Golden of the New York office of William M. Mercer, which had conducted the study.

The two most popular tax approaches for golden parachutes are

* The cutback approach. …

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