_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 4, No. 23: December 4, 2003
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Publisher: LSN Employment, Labor, Compensation & Pension Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2003. All rights reserved.
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Topic of This Issue:
Executive Compensation and Tax
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"Golden Parachute as a Compensation Shifting Mechanism"
Journal of Law, Economics and Organization, Vol. 20, No. 1,
April 2004
ALBERT H. CHOI
University of Virginia
Department of Economics
"Code Sec. 72(t) and Substantially Equal Periodic Payments - Part
I"
Journal of Retirement Planning, Vol. 6, No. 3, May-June
2003
WILLIAM J. STECKER
The Marble Group, Ltd.
"Severance Pay and the Imposition of FICA or SE Tax"
Tax Notes, Vol. 101, No. 8, p. 999, November 24, 2003
BURGESS J.W. RABY
Raby Law Offices
University of Arizona Law School
Arizona State University Law School
WILLIAM L. RABY
Raby Law Offices
Arizona State University
"Incentive Stock Options and the Alternative Minimum Tax: The
Worst of Times"
Harvard Journal on Legislation, Vol. 39, No. 2
FRANCINE J. LIPMAN
Chapman University
School of Law
WORKING PAPERS
"Board Structure and Executive Compensation in Nonprofit
Organizations: Evidence from Hospitals"
JAMES A. BRICKLEY
Simon School, University of Rochester
R. LAWRENCE VAN HORN
Simon School, University of Rochester
GERARD J. WEDIG
Simon School, University of Rochester
"Do Executives Perform for Pay?"
RENéE B. ADAMS
Stockholm School of Economics
Department of Finance
DANIEL FERREIRA
SITE - Stockholm School of Economics
S S R N I N F O R M A T I O N
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EDITORIAL POLICIES
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Benefits, Compensation & Pension Law we do not referee working
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scholarly discourse.
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Golden Parachute as a Compensation Shifting Mechanism"
Journal of Law, Economics and Organization, Vol. 20, No. 1,
April 2004
BY: ALBERT H. CHOI
University of Virginia
Department of Economics
Contact: ALBERT H. CHOI
Email: Mailto:ahc4p@virginia.edu
Postal: University of Virginia
Department of Economics
114 Rouss Hall
P.O. Box 400182
Charlottesville, VA 22904-4182 UNITED STATES
Phone: 434-924-3210
Fax: 804-982-2904
ABSTRACT:
We demonstrate how a golden parachute can be used to improve the
target shareholders' net return by partially shifting the
managerial compensation burden to the buyer through a higher
acquisition price. Consistent with the empirical observations,
we show that 1) golden parachute will be contingent on a
change-of-control rather than solely on the manager's layoff, 2)
golden parachute will be promised early, e.g., at the time of
the manager's employment, not just in the face of a takeover or
a merger, 3) the shareholders would want to extend its coverage
to other employees, and 4) the size of the parachute can be much
larger than the manager's annual compensation. We also examine
the effect of a golden parachute on the managerial incentive
scheme.
______________________________
"Code Sec. 72(t) and Substantially Equal Periodic Payments - Part
I"
Journal of Retirement Planning, Vol. 6, No. 3, May-June
2003
BY: WILLIAM J. STECKER
The Marble Group, Ltd.
Contact: WILLIAM J. STECKER
Email: Mailto:Themarblegroup@earthlink.net
Postal: The Marble Group, Ltd.
30671 Bearcat Trail
Conifer, CO 80433 UNITED STATES
Phone: 303-816-2543
ABSTRACT:
At the dawn of the 21st century, many taxpayers have acquired
substantial retirement assets in a variety of tax-deferred
vehicles, including (1) employer sponsored plans, such as profit
sharing plans, employee contribution plans and the conversion or
lump sum distribution from older defined benefit plans; (2)
personally initiated traditional individual retirement accounts,
including those funded by annual contributions and rollovers;
and (3) simplified employee pension accounts.
All distributions from the aforementioned accounts are
governed by Code Sec. 72(t), which, in addition to regular
federal income tax, imposes a 10-percent surtax on all
distributions unless one or more of the 12 exceptions are
applicable. However, more and more frequently, taxpayers in
their 30s, 40s and early 50s are voluntarily (and sometimes
involuntarily) looking to their retirement assets and
contemplating some form of early retirement. Further, they are
often perplexed as to how to access these assets without undo
tax burden as required by Code Sec. 72(t).
As of January 2003, Code Sec. 72(t) provides 12 reasons or
exceptions that qualify taxpayers to withdraw monies from their
401(k)s or IRAs (collectively called "deferred accounts") and
avoid the 10-percent surtax. These exceptions generically fall
into two types: transaction or cause-specific and
process/multi-year. There are seven transaction or
cause-specific exceptions. All seven of these
transaction-specific exceptions tend to be limited in scope and
represent a "helping hand" to the taxpayer in circumstances of
financial distress. Conversely, the primary focus of this text
is to closely examine the other five "process" or "multi-year"
exceptions. Most of the article is tax-oriented, more
specifically designed to avoid the 10-percent surtax on early
distributions.
______________________________
"Severance Pay and the Imposition of FICA or SE Tax"
Tax Notes, Vol. 101, No. 8, p. 999, November 24, 2003
BY: BURGESS J.W. RABY
Raby Law Offices
University of Arizona Law School
Arizona State University Law School
WILLIAM L. RABY
Raby Law Offices
Arizona State University
Contact: BURGESS J.W. RABY
Email: Mailto:RABYLAW@AOL.COM
Postal: Raby Law Offices
2164 E. Broadway Rd. #280
Tempe, AZ 85282-1784 UNITED STATES
Phone: 480-967-1501
Fax: 480-967-0975
Co-Auth: WILLIAM L. RABY
Email: not available
Postal: Raby Law Offices
2164 E. Broadway Rd. #280
Tempe, AZ 85282-1784 UNITED STATES
ABSTRACT:
Burgess J.W. Raby, Esq., and William L. Raby, CPA, both
associated with the Raby Law Office, Tempe, Ariz., discuss
recent cases dealing with the application of FICA and
self-employment taxes to severance pay.
______________________________
"Incentive Stock Options and the Alternative Minimum Tax: The
Worst of Times"
Harvard Journal on Legislation, Vol. 39, No. 2
BY: FRANCINE J. LIPMAN
Chapman University
School of Law
Contact: FRANCINE J. LIPMAN
Email: Mailto:lipman@chapman.edu
Postal: Chapman University
School of Law
One University Drive
Orange, CA 92866-1099 UNITED STATES
Phone: 714-997-6705
Fax: 714-628-2576
ABSTRACT:
Congress enacted the Alternative Minimum Tax ("AMT") to preclude
high income individuals from escaping their federal income tax
liabilities by artful manipulation of certain tax provisions. In
recent years, increasing numbers of moderate-income taxpayers
have been subject to AMT. The problem has been especially acute
for technology sector employees who exercised incentive stock
options ("ISOs") while the market was high, sold their stock
after its value fell, and found themselves owing AMT they could
not afford to pay. This Essay explains the complexity of ISOs
and the AMT and argues that the AMT adjustment for ISOs should
not be eliminated, but rather that other reforms should be
enacted to target more appropriately the AMT. The proposed
reforms should simplify tax treatment of ISOs and reduce the
number of ISO exercisers who are subject unknowingly to AMT.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Board Structure and Executive Compensation in Nonprofit
Organizations: Evidence from Hospitals"
BY: JAMES A. BRICKLEY
Simon School, University of Rochester
R. LAWRENCE VAN HORN
Simon School, University of Rochester
GERARD J. WEDIG
Simon School, University of Rochester
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=468423
Other Electronic Document Delivery:
http://www.simon.rochester.edu/fac/vanhorn/Conference.
htm
SSRN only offers technical support for papers
downloaded from the SSRN Electronic Paper Collection
location. When URLs wrap, you must copy and paste
them into your browser eliminating all spaces.
Paper ID: Organizational Economics of Health Care Conference
2003
Date: October 1, 2003
Contact: R. LAWRENCE VAN HORN
Email: Mailto:vanhorn@simon.rochester.edu
Postal: Simon School, University of Rochester
Carol Simon Hall 3-149
Rochester, NY 14627 UNITED STATES
Phone: 585-273-4890
Fax: 585-442-6323
Co-Auth: JAMES A. BRICKLEY
Email: Mailto:BRICKLEY@SIMON.ROCHESTER.EDU
Postal: Simon School, University of Rochester
Carol Simon Hall 3-160L
Rochester, NY 14627 UNITED STATES
Co-Auth: GERARD J. WEDIG
Email: Mailto:wedig@simon.rochester.edu
Postal: Simon School, University of Rochester
Rochester, NY 14627 UNITED STATES
ABSTRACT:
In contrast to managers of for-profit corporations, nonprofit
(NP) managers do not face disciplinary pressures from hostile
takeovers, concentrated shareholders, or equity-based
compensation plans. Past authors have argued that the lack of
alternative control mechanisms implies that NP boards should
contain few, if any, managers as voting members. This study
finds that when NP hospital CEOs are voting members of their
boards, their compensation is about 10 percent higher than when
they are ex officio members or simply staff (controlling for a
rich set of economic factors that are expected to produce
crosssectional variation in CEO compensation). The results are
consistent with the hypothesis that NP boards are more effective
at controlling managerial agency problems when they do not
contain internal managers as voting members. While this
interpretation is subject to the usual caveats about potential
omitted variables and endogeneity biases, these problems are
arguably less severe in this study than in related studies from
the for-profit sector.
______________________________
"Do Executives Perform for Pay?"
BY: RENéE B. ADAMS
Stockholm School of Economics
Department of Finance
DANIEL FERREIRA
SITE - Stockholm School of Economics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=459821
Date: October 2003
Contact: RENéE B. ADAMS
Email: Mailto:renee.adams@hhs.se
Postal: Stockholm School of Economics
Department of Finance
SE-113 83 Stockholm, SWEDEN
Phone: +46-8-736 91 61
Fax: +46-8-31 23 27
Co-Auth: DANIEL FERREIRA
Email: Mailto:Daniel.Ferreira@hhs.se
Postal: SITE - Stockholm School of Economics
P.O. Box 6501
S-113 83 Stockholm, SWEDEN
ABSTRACT:
In this paper we investigate an important assumption underlying
the literature on executive compensation: that top executives
respond to financial incentives. To date there is little work on
this issue because of the difficulty of measuring managers'
responses to contracts. Using detailed data on boards of
directors of Fortune 500 companies, we are able to document that
directors are less likely to have attendance problems at board
meetings when board meeting fees are higher. These results are
robust to controlling for director characteristics and are
qualitatively similar after addressing the potential endogeneity
of meeting fees. Thus we conclude that our results are
consistent with the idea that members of the top management team
"perform for pay." We argue that the results contribute both to
the literature testing whether incentives matter and to the
governance literature. Our findings are perhaps surprising
because meeting fees in our sample are on average only $1,100
for each meeting attended, an arguably small fraction of the
total wealth of a representative director of a Fortune 500
firm.
Keywords: Directors, Executive Compensation, Incentives,
Attendance, Board Meetings