Call For New Legislation To Curb Deferred Compensation Schemes

by Leroy Baker, Tax-News.com, New york

10 April 2003

Tax experts told a Senate Committee hearing this week how 127 former Enron executives took $50 million from a $200 million deferred payment fund just before the company filed for bankruptcy protection in late 2001.

Pamela F. Olson, assistant Treasury secretary for tax policy told the Senate Finance Committee: "The company permitted its executives to defer staggering amounts of income but took measures to insulate them from the risk of nonpayment that the law requires as a trade-off for tax deferral," according to a report from the Washington Post.

This runs counter to the spirit of the law relating to deferral, as Olson pointed out. Money set aside for deferred executive pay is supposed to be accessible to creditors in the event that the business fails. That means the deferral of pay must have an element of risk for the executives.

It is unclear to what extent this practice is used in the rest of the corporate world. There is a certain amount of information on executive pay held at the Securities and Exchange Commission, although not enough on the practice of deferred compensation.

However, one firm which specialises in consulting on such matters, Towers Perrin, indicated in testimony to the Senate Finance Committee that it advised Enron on the basis of information collected from other firms' policies on deferred compensation. This led the panel to believe that the practice is more widespread than anticipated.

Charles E. Essick, head of the Houston office of Towers Perrin denied that he advised Enron to do anything illegal or immoral, and suggested that such activities were "standard practice in the market place."

Senate Finance Committee chairman Charles Grassley said he had no issues with the levels of pay received by executives, although he was bothered by abuses of the system, and is considering the introduction of legislation to tackle the problem.

The Bush administration is known to be sympathetic towards new laws governing deferred compensation, and is proposing to repeal the legislative ban that forbids the Treasury Department and the IRS from writing any new regulations on the subject.

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