IRS Chief: CFO Pay Should Be Fixed

The ranking minority member of the Senate Finance Committee thinks that a proposal by the nation's top tax collector to strip CFOs of their stock options might be ripe for legislation.

Testifying before the committee on Wednesday, Internal Revenue Service Commissioner Mark Everson said that the practice by some corporate heads of backdating stock-option grants and exercise dates is "abhorrent. These executives are already plenty rich and don't have to cheat on their options." He said that the IRS will follow up on every company in which abuses have been found, including violations of 409(a), a new tax code rule affecting deferred compensation arrangements.

Under Everson's pay proposal, which he first floated in a speech before the National Press Club on March 14, finance chiefs, corporate general counsels, and non-executive board chairs would get "generous but fixed compensation for specified contract periods."

At the Finance Committee hearing, Everson said he was worried about the huge allure that stock appreciation poses for top executives and board members, demanding "heroic" virtue to keep from wrongdoing. CFOs, top corporate attorneys, and board chairs, who are charged with "minding the cookie jar" shouldn't be paid in stock options, he contended.

Sen. Max Baucus (D-Mont.), the ranking Democrat on the committee, brought up the IRS chief's proposal and asked Everson at the hearing if Congress should pursue limits on tax deductibility that could generate fixed pay packages for corporate gatekeepers. Federal tax code Section 162(m), which went into effect in 1993, limits the tax deductibility of the pay awarded to certain top executives to $1 million. The cap doesn't apply to stock options and other performance-based compensation.

"I'm not suggesting that Congress step in on this," Everson replied. Instead, option-less CFO, general counsel, and board chair pay should be imposed by corporate boards, he said, adding that "boards would be better served if the CFO has a fixed package and has absolutely no incentive [to backdate options]."

Another committee witness, Linda Thomsen, the Securities and Exchange Commission's director of enforcement, testified, however, that backdating was often a "collusive and hidden" practice that investigators found hard to unearth. If certain intricacies of executive compensation are that difficult to discover, Baucus said, he didn't know whether corporations could effectively police themselves.

In the context of the current huge gap between taxes owed and taxes paid and widespread media reports of excessive executive pay, the problem of backdating has become material enough for Congress to consider legislation to curb it, the senator suggested.

Currently, the SEC’s Enforcement Division is probing more than 100 companies concerning possible fraudulent reporting of option grants, including Fortune 500 companies and companies with smaller capitalizations, Thomsen said. Although "a large number of the companies involved are from the technology sector, the companies under investigation span multiple industry sectors," she testified.