Deferred Comp Measure Runs Into Opposition

March 28, 2007

At the beginning of the year, it looked as if minimum wage legislation would also be a vehicle for the first executive pay action of the new Congress.

Several weeks later, however, provisions in the Senate version of the wage measure that would limit deferred compensation and extend a portion of the tax code covering a company’s five highest-paid employees have run into stiff headwinds from the business community and the House.

The Senate has approved as part of its wage bill a measure that would limit the amount of compensation that could be deferred tax free each year to $1 million or the five-year average of an individual’s salary before the deferral, which ever is less.

The provision, meant to target executives, would generate tax revenue to help pay for $8.3 billion in tax cuts designed to help alleviate the impact of the wage increase—from $5.15 to $7.25 over two years—on small businesses.

The House passed a companion bill to its minimum wage legislation that contains $1.3 billion in tax cuts but none of the Senate’s compensation provisions.

It’s not clear when the House and Senate will resolve their differences. In addition, the House has attached its wage and related tax bills to an Iraq emergency funding bill.

As a preview of potentially conten­tious negotiations, the House Ways & Means Committee held a mid-March hearing to give business representatives a chance to air their grievances about the Senate bill.

They warned that the deferred compensation proposal would undermine retention and retirement programs for workers far below the corporate suite.

Greg Heaslip, vice president of benefits at PepsiCo, said the company allows employees to defer base salary and bo­nuses as a way to encourage retirement savings.

He’s worried that under the Senate plan, strong investment returns and other accruals would wind up subjecting employees to tax penalties on money they haven’t yet received—a situation that would undermine pensions.

“In today’s environment, traditional defined-benefit plans already face many challenges,” he said in prepared testimony. “Disenfranchising middle and senior managers from these plans would add another huge challenge to the continuation of these plans.”

Another witness argued that deferring an executive’s compensation increases his or her incentive to help a corporation thrive into the future.

“That’s a pretty good way of aligning [a CEO’s] interests with that of a company,” says Kenneth Petrini, vice president, taxes for Air Products and Chemicals Inc., who testified on behalf of the National Association of Manufacturers.

There may be room for House-Senate compromise on deferred compensation and highest-paid employees, according to an aide to Sen. Charles Grassley, R-Iowa and the ranking member of the Senate Finance Committee. Grassley and Sen. Max Baucus, D-Montana and committee chairman, authored the Senate tax package.

“He’s willing to modify them in conference if it’s clear … that the provisions will unfairly target middle-income workers who are simply saving for retirement rather than the corporate top executives who receive enormous compensation packages regardless of their performance, and at shareholders’ expense,” says Jill Gerber, a Grassley spokeswoman.

—Mark Schoeff Jr.