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Executive Compensation: The Basics and Compliance Implications

 

According to the Economic Policy Institute, "Average pay of CEOs at the top 350 firms in 2018 was $17.2 million — or $14.0 million using a more conservative measure." High salaries for CEOs always make headlines, but there's more that employers and payroll administrators need to know about executive compensation.

What is executive compensation?

The term "executive compensation" covers renumeration for upper-level management, such as C-suite members (e.g., CEO, chief financial officer, chief operations officer, chief human resources officer), vice presidents and other senior management employees.

What does executive compensation include?

Typical hourly and salaried employees usually receive base pay, normal benefits packages and standard additions to pay, such as bonuses or overtime wages. Executive compensation tends to go much further, especially in larger organizations. While specifics vary by organization and role, executive compensation often consists of the following:

  • Base salary. It's not uncommon for executives to be paid monthly, unlike typical hourly and salaried employees, who are usually paid weekly or biweekly.
  • Short-term incentives, such as a bonus for improving company revenue or developing a profitable new product.
  • Long-term incentives, such as stock options and performance shares.
  • Enhanced benefits and perks that go beyond programs offered to lower-level employees, such as additional insurance coverage and paid time off, use of a company vehicle or company airplane, travel and auto allowances, reserved parking, club memberships, and special retirement plans.
  • Severance, such as cash benefits for an extended period of time, current-year bonus payments, compensation for long-term incentives (e.g., restricted shares/stocks) and continuation of health care benefits.

What are some compliance considerations for executive compensation?

Fair Labor Standards Act (FLSA)

The FLSA is the law that requires overtime pay for all employees who do not satisfy its salary basis and job duties tests. To qualify as FLSA-exempt, executives must receive no less than $684 per week. It's important to check state law, as well, for overtime exemption standards that might apply to executive employees.

The FLSA also has an overtime exemption category for highly compensated employees (HCEs). To qualify for the HCE exemption, the employee must earn $107,432 or more per year and must regularly perform at least one of the responsibilities of an exempt executive, administrative or professional employee.

Employee benefits and nondiscrimination laws

Employers must keep nondiscrimination laws in mind when making benefits decisions for executive and non-executive employees. For helpful guidance, see the EEOC's employee benefits compliance manual. Also, pay attention to 401(k) nondiscrimination rules for HCEs and key employees.

Family and Medical Leave Act (FMLA)

If certain conditions are met, an employer may deny job restoration to key employees who take FMLA leave.

Taxation

The IRS has guidelines for withholding taxes on executive pay, withholding taxes on supplemental wages over $1 million, the deductibility of executive compensation and the taxation of executive deferred compensation plans. Be sure to consider applicable state and local tax laws as well.

Executive pay administration requires strong knowledge of related payroll laws and best practices. If you lack expertise, consider outsourcing your payroll responsibilities to a service provider that understands the nuances of administering executive pay.

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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