The IRS tackles excessive executive compensation.

• Author: Longnecker, Brent M.
• Position: Law & Justice - United States Internal Revenue Service

"... Where there is smoke, there is fire, and many companies are not in complete compliance while others are underreporting. "

OVER THE PAST few years, there has not been a headline, outside of the war in Iraq, that has received as much attention and press space as "executive corruption and abuse" and its supposed evil twin sister, "excessive executive compensation." As a result, corporate governance and compensation reforms have abounded. Included in the mix are the Sarbanes-Oxley Act, expensing of stock options, new stock exchange guidelines, and the Internal Revenue Service's initiative to determine the extent of noncompliance with respect to specific executive compensation issues. Indeed, the IRS has assigned a higher priority to the examination of issues surrounding executive pay as it relates to corporate tax laws.

Bottom line, the IRS has been able to prove that, in many cases, where there is smoke, there is fire, and many companies are not in complete compliance while others are underreporting.

Actually, executive compensation has become more formulaic and easier to understand in recent years. With tools such as proxy reports disclosing the amount of compensation received by the top five officers of a company, online services and published reports, the curtain has been pulled back a bit. Moreover, companies must be in compliance with the IRS, Securities and Exchange Commission, and other legal entities--thus pushing them more towards the middle.

However, there remains the increasingly diversified needs of executives, as a result of age, family, health care, motivation, company outlook, new legislation, etc. Companies, out of necessity more and more are designing innovative ways to maximize their return on their most expensive and important asset--their people.

One solution may be an individually tailored compensation package. This approach allows executives to weigh the compensation alternatives of at-risk compensation vs. guaranteed compensation, benefits, and retirement as they relate to their individual situations.

Since the amount of reasonable total direct compensation efficiently is determined in today's environment, the challenge is how to balance equally the varying forms of compensation. For instance, how many dollars of base salary is equal to one dollar in annual incentive target opportunity? This question may never be answered by a true scientific or mathematical formula because different individuals have different...