IRS To Scrutinise Executive Pay Abuses

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

21 June 2004

According to reports, the Internal Revenue Service is training its sight on firms who are allegedly paying top executives bonuses even when the performance targets upon which the bonuses are based are missed.

According to a Wall Street Journal report, Catherine Livingston Fernandez, head of the executive-compensation branch for the IRS's Office of Chief Counsel, told an executive pay conference that audits revealed how "performance goals aren't being met and the compensation is made anyway." Such practices have supposedly been uncovered at 24 large firms.

By fixing pay to performance targets, a publicly traded firm is able to create certain tax benefits. The IRS limits pay deductions to $1 million for the firm’s top five executive officers unless this is officially linked to some kind of performance target. A company that wants to deduct bonuses from tax must define the targets on which they are based.

Fernandez indicated that the practice of breaking the $1 million cap is common enough for the IRS to include its investigation into a standard audit.

Following a number of corporate scandals in recent times, the IRS began some 18 months ago to scrutinize various aspects of executive compensation, including stock options, severance packages, deferred compensation and an assortment of fringe benefits.

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