Between live-blogging the mid-year meeting last week and catching up back home, I'm just now getting into all of the TARP stuff the administration announced last week. I have two initial reactions from my quick skim, and I'll put them in two separate posts.
First, Treasury is prohibiting gross ups for TARP recipients, and I think that's a very good thing. Gross-ups basically reimburse executives for the taxes they pay on compensation. The problem is that these reimbursements create new taxable compensation, and the company then has to cover taxes on that new amount, which is then also taxable. This creates a tax death spiral. According to a Mark Maremont WSJ article from December 22, 2005, "Grossing up an executive for taxes on $1 million can easily cost an additional $700,000 to $900,000." Gross-ups always struck me as a weaselly and wasteful way to increase executive pay under the table. The CEO gets the benefit of not paying taxes, but the company has to pay a lot more in taxes than it otherwise would. Why not just pay the guy more up front? Oh, because it looks bad. Highly compensated employees of TARP recipients shouldn't get gross-ups. Maybe no one should.
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1. Posted by Jake on June 17, 2009 @ 20:20 | Permalink
Usha writes: "Gross-ups always struck me as a weaselly and wasteful way to increase executive pay under the table. The CEO gets the benefit of not paying taxes, but the company has to pay a lot more in taxes than it otherwise would. Why not just pay the guy more up front? Oh, because it looks bad."
This point confuses me. In their 10-Ks, companies disclose executive compensation including any tax gross-ups (whether or not the tax gross-ups are labeled as such). The optics of tax gross-up arrangements for executives are a non-issue.
2. Posted by Usha on June 18, 2009 @ 8:43 | Permalink
Thanks for your comment, Jake, and you're right, gross ups do have to be disclosed as "other compensation." But someone must think that gross ups look better than a straight salary increase, or they wouldn't exist, right?
3. Posted by Jake on June 18, 2009 @ 20:54 | Permalink
Usha, you are correct. At one point in my career I was responsible for doing tax gross-up calculations for corporate executives. It was a hateful task. Few were happy with the result, and most feared disclosure.
So what is the solution?
1. Disclosure.
2. Outright ban on tax gross-ups.
3. Lowering marginal tax rates such that gross-ups are of less value.
In the current Leninist regulatory environment, the third option seems to be off the table.
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