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2012 Annual Incentive Payouts and Should You Pay Them In 2012 Before 2013 Possible Tax Increase

The year is coming to an end, performance is being reviewed, and bonus awards are being prepared for 2012 performance.  At the same time, the current administration is in a battle with Congress debating the extension of the Bush era tax rates, which has people worried about the possibility of losing out on some of their annual incentive awards.  We have had several clients and other interested parties contact us to get our opinion on whether or not they should payout the awards before the end of the year in order to avoid this issue, so we decided to reach out to our clients and get their opinions and what, if any, actions they are taking.  

In short, most companies will avoid accelerating the bonuses to take advantage of better taxes.  Our discussions in the boardroom, it is the larger public companies who are avoiding the issue due to disclosure and administration of acceleration, in addition to the “cons” listed below.  Mid and small market public companies are a bit more open, but still hesitant due to the same issues. Disclosure and administration becomes less the smaller you get.  All in, we would estimate less than 5% of all public companies will accelerate the timing of the bonuses paid.  Private companies will probably be more likely to accelerate, but again, I think Boards are somewhat reluctant to accelerate the bonus payments for the same reasons.

A simple list of pros and cons discussed in the boardroom are:

Pros

–  Reduces the potential increased tax burden for the employees

–  Payment comes before the Holiday Season

Cons

–  Out of cycle award creates a potentially bad precedent and would require the compensation committee to approve

–  Payment before knowing the actual results

–  No current market support for it, especially in public companies

–  Administrative burden may be too large especially for large companies

–  While accelerating the bonus to December 2012 potentially reduces the tax rate, it shortens the period to pay taxes by approximately one    year

–  Double annual incentive for 2012 could push employees or executives into another tax bracket

If you have any questions or would like to discuss/share your opinion on the matter we would really enjoy the opportunity.  Please let us know through the comments section, or you can Contact Us directly.

 

This blog post was written by Chris Crawford, COO and Executive Director of Longnecker & Associates

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