When an executive receives certain compensation perks, such as relocation expenses, use of a corporate vehicle or a golden parachute payment, that executive generally must report the perk as income and is therefore faced with the resultant taxes. In order to prevent having a large percentage of an offered perk being sent to the government as taxes, many employers offer tax “gross-ups” to their executives in order to offset some of this burden.

What are the mechanics of the gross-up calculation? A gross-up is an additional payment made by the employer to account for the taxes paid pursuant to the initial job perk. For instance, if an executive is offered a one-time payment of $10,000 for relocation expenses, the actual amount of the payment made may be $15,406 (at an aggregate federal and state income and payroll tax rate of 35.45%). Such an increased amount would represent the taxes due by the executive on the payment, leaving him or her with the promised $10,000 after the required taxes are deducted.

Understand the interaction between gross-ups and golden parachutes. In relation to golden parachute payments, the gross-up may be set up as a full gross-up, in which the executive is placed in the same after-tax position he or she would have been had it not been for the Internal Revenue Code rules with respect to the excise tax on excess golden parachute payments. Some employers modify this approach by providing a gross-up payment only when the golden parachute payments exceed the Code threshold by a particular amount.

Are there shareholder disclosure requirements associated with gross-ups? Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies who provide golden parachute payments and gross-ups must comply with additional disclosure requirements. The Act provides that shareholders in public corporations must be given a non-binding advisory vote on compensation of the company’s most senior executives at least every three years and disclosures and a non-binding advisory vote on golden parachute payments (including any gross-ups). The required disclosures include a “clear and simple” description of compensation arrangements with executives and a statement of the aggregate total of all compensation that may become payable to such individuals in the event of a change in corporate control, which includes golden parachute payments and accompanying gross-ups.

Negotiate gross-ups to avoid having taxes eat into the buying power of your compensation package. Therefore, when entering into compensation arrangements concerning certain perks, executives must keep in mind the tax consequences of the arrangement as a whole and not just with relation to salary. Gross-ups are an effective way for an executive to obtain the full extent of the compensation package agreed to. However, executives in public corporations must now keep in mind that any gross-ups to be paid in relation to a golden parachute payment will be disclosed to shareholders for a non-binding advisory vote and thus will be subject to additional scrutiny.

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