Academic

Last Week's News Part I: Gross-ups

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

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.

Full post as published by Conglomerate on June 17, 2009 (boomark / email).