US Senate To Probe Executive Compensation Arrangements

by Mike Godfrey, Tax-News.com, Washington

29 August 2006

Sen. Chuck Grassley, Chairman of the Senate Finance Committee, has scheduled a hearing for next month to examine whether rules governing executive compensation need "beefing up."

In a statement, Grassley said that he is worried that despite the improvements in corporate governance following major scandals such as the Enron affair, executives still appear to be flouting tax and shareholder disclosure rules with regard their compensation arrangements.

One area that Grassley wants to examine closely is the practice of backdating stock options, whereby executives wait until after the fact to pick a date for their stock options, then pick the low point of the stock during the year to maximize their profit.

The tax code governs certain aspects of executive compensation and imposes a tax unless pay of more than $1 million is performance-based compensation. Grassley said that in response to these rules, there has been a big upswing in stock options to compensate corporate executives.

“It’s one thing for an executive to make big profits because he’s improved his company, but it’s a whole different thing to make big profits because he’s playing fast and loose with the books," Grassley remarked.

"It’s frustrating to think that after the corporate scandals of recent years, some executives are still looking for ways to take unfair advantage for personal gain. On top of that, it looks as though boards of directors are approving bad deals without shareholder approval," he added.

The hearing, set for September 6 in Washington D.C., will include testimony from the Justice Department deputy attorney general, IRS Commissioner Mark Everson, and a senior official from the Securities and Exchange Commission. A second panel will consist of academics and interested groups.

"If the tax laws are inadequate on stock options backdating, I want to beef them up," said Grassley.

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