Key Points:
- Innovative Compensation: Beyond salary, explore the world of executive perks such as company cars, exclusive memberships, and flexible work arrangements that play a crucial role in attracting and retaining top talent.
- Tax Implications: Delve into the murky waters of tax considerations for these perks, including what’s taxable, potential penalties, and how to navigate these complexities.
- Professional Growth: Discover how certain perks like educational assistance and exclusive club access can significantly contribute to an executive’s professional development and networking opportunities.
- Strategic Negotiation: Learn strategies to negotiate for perks when salary increases are not an option, and understand the importance of discreetly discussing and obtaining these benefits.
- Legal Considerations: Understand the legal aspects of executive perks, including obtaining written approval for gray area items and the binding nature of educational assistance agreements.
Introduction
Beyond the base salary, bonuses, and all the sexy equity compensation we’ve been discussing lies the stealthy but very lucrative perks and benefits component of compensation. Perks and other benefits are crucial in attracting and retaining top-tier executive talent. We’ll discuss some real-world examples, examine their tax implications, explore tax planning opportunities, and ultimately understand the significant impact of these incentives on overall executive remuneration.
Even better, the discussion might provide some compensation ideas to discuss when your manager or board tells you they are unable to increase salaries or informs you that you have “topped out” the range for your role. If you find yourself in that position, reach into your playbook and ask for a perk instead. You may find your company more willing to provide a perk or benefit than dollar compensation due to optics, even if the benefit to you is the same.
Examples of Executive Perks and Benefits
Company perks and benefits can be complex, often assigned subjectively, and, in some cases, undocumented. The list below comprises some of the more mainstream items in the marketplace, but it is by no means exhaustive. Discovering additional perks available at your company can be best achieved through informal conversations with coworkers, whether during lunch or over drinks. They may casually mention a recent perk or discuss its administration.
If you later pursue the same perk, avoid mentioning how you heard about it or that someone else has it. That will only put the manager on the defensive and have them thinking about who told you. Instead, propose the idea as if you stumbled upon it independently and observe how it unfolds. Sharing names or sources might tarnish your reputation, creating an impression that you cannot keep sensitive information confidential, particularly if you hold an executive position.
Expensing Items
Let’s clarify that we are not referring to business-specific expenses, which should always be reimbursed and are not considered perks. Instead, we are discussing instances where a company allows employees to expense costs that may fall into a gray area, involving some level of personal use. Such expenses include lunches, cell phones, home internet, premium credit card membership fees, and gasoline for personal vehicles. This practice of expensing gray area items is a reasonably common perk, especially at smaller companies, often extended to employees beyond the executive level.
One note: You should receive written approval from someone in your organization before expensing a gray area item. One of the most common ways companies terminate employees they have decided to part ways with is through expense report audits. If they find you violated the expense reporting policy, you could be terminated with cause, losing access to golden parachutes, unvested equity compensation, and unemployment benefits (depending on the state). Having written approval will protect you from these events.
Company Car and Chauffeur
Depending on your role or industry, a chauffeur might be a little excessive, but providing a luxurious company car is a common perk for top executives. Not only does it enhance their status, but it also makes your commute a little more enjoyable. If a luxurious car does not appeal to you, another option is to ask for a car allowance (or an increased one). The car allowance would increase your total compensation but keep the expense out of the salary expense line on the budget, which is often analyzed by corporations and their army of financial analysts.
Executive Health and Wellness Programs
Many companies offer specialized health and wellness programs tailored exclusively for top executives. These programs often include access to top-tier medical facilities, personal trainers, and wellness retreats. It may go as far as having a concierge, white glove, medical consultant who organizes your healthcare and ensures all preemptive tests have been completed. They can also assist you in coordinating any necessary follow-ups and procedures.
Exclusive Memberships, Club Access, and Tickets
One of the most sought-after perks for executives is the inclusion of exclusive memberships, access to country clubs, or tickets in their compensation packages. This highly coveted benefit offers a sense of prestige and presents opportunities for executives to network with other influential industry leaders, fostering valuable relationships that can significantly impact their professional growth.
Among the most iconic examples of this perk is the country club golf membership, granting executives unrestricted access for business purposes, leisure, and personal enjoyment. Beyond the golf course, these exclusive clubs often offer numerous amenities, including state-of-the-art fitness centers, gourmet dining experiences, and lavish social events. The environment created within such clubs provides a conducive setting for networking, idea exchange, and collaboration among executives from various domains.
Flexible Work Arrangements
High-level executives frequently face demanding schedules, and providing them with flexible work arrangements can be instrumental in achieving a healthy work-life balance, resulting in heightened productivity and increased job satisfaction. In the post-COVID-19 era, flexible work arrangements have gained significant momentum, becoming more commonplace across industries. However, these arrangements remain a highly valued and sought-after benefit for many executives, particularly those with family commitments.
In recognition of executives’ unique challenges in juggling personal and professional responsibilities, companies are increasingly offering tailored, flexible work options. Such arrangements may include options for remote work, flexible hours, compressed workweeks, or even job-sharing arrangements. By allowing executives to customize their work schedules, they can better manage their personal commitments while still fulfilling their professional duties.
Educational Assistance
Most major corporations recognize the importance of continuous learning and offer their employees some form of educational support. Typically, this includes tuition reimbursement, allowing employees to pursue further education, subject to a maximum limit, sometimes based on their grades and the relevance of the degree to their current or potential future job roles.
For high-level executives, companies may be willing to sponsor attendance in prestigious Executive MBA programs, such as those offered by renowned institutions like Wharton, which cost $223,500 for the two-year degree as of this writing. Covering the cost of such an esteemed program as part of the executive’s compensation package underscores the company’s investment in its leadership while serving as a testament to the executive’s capabilities and potential. Such investments in executive education can significantly enhance the executive’s status and preparedness for future leadership positions within the organization (or outside it).
In some exceptional cases, the educational assistance may extend even further, encompassing travel expenses to and from the program location. I know one executive who negotiated expenses related to traveling out of state to Pennsylvania to attend Wharton’s Executive MBA program.
For more expensive educational options, the company may require a length of service requirement after completing the degree. If you decide to quit your job before completing the minimum service requirement, your company may ask you to pay back the expenses they incurred on your behalf. It’s important to understand that these agreements are legally binding, and the company may take legal action to recover their costs. Therefore, taking them seriously and assessing the potential consequences before signing them is crucial.
As we have explored an array of enticing perks and benefits designed to elevate the executive experience, it is crucial to recognize that these additional incentives may have implications beyond their immediate allure. One aspect that warrants careful consideration is the tax impact associated with such perks. Next, we will delve into the tax treatment of executive perks and benefits, shedding light on the various tax considerations that organizations and executives should be aware of.
Tax Impacts of Perks and Benefits
The tax impact of these benefits is when we enter murky waters …
The IRS makes it clear that fringe benefits are a form of compensation and need to be included in compensation and reported on the employee’s W2:
A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.
Fringe benefits are generally included in an employee’s gross income (there are some exceptions). The benefits are subject to income tax withholding and employment taxes. Fringe benefits include cars and flights on aircraft that the employer provides, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events.
In general, the employer must include the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it, plus any amount that the law excludes. There are other special rules that employers and employees may use to value certain fringe benefits. For more information, see Publication 15-B, Employers’ Tax Guide to Fringe Benefits.
It becomes complicated because often, the corporation does not report the taxable income associated with these perks and benefits. Employees who receive taxable fringe benefits that are not reported as income may still be liable for taxes on the benefit, even if they were unaware of the omission. The Internal Revenue Service (IRS) may also assess penalties on the employer.
The consequences of failing to report a taxable fringe benefit will depend on several factors, including the value of the benefit, the employee’s tax bracket, and whether the employer was aware of the omission. However, in general, the employee could be liable for:
Income tax on the benefit’s value
The benefit’s value is generally the benefit’s fair market value, as determined by the IRS. The tricky part of this calculation is usually determining the portion of the cost related to business use from the amount related to personal use. Keeping detailed records is essential to support your case.
Interest on unpaid taxes
The IRS will charge interest on unpaid taxes at a rate equal to the federal short-term rate plus three percentage points.
Penalty for underpayment of taxes
The IRS may also assess a penalty for underpayment of taxes if the employee did not pay enough taxes during the year to cover the value of the unreported fringe benefit.
Not that the executive is concerned, but the employer could also be liable for:
Penalty for failure to withhold taxes
The employer is required to withhold taxes from the employee’s wages, including the value of any taxable fringe benefits. If the employer fails to withhold taxes on a taxable fringe benefit, they may be liable for a penalty.
Penalty for failure to file an information return
The employer is required to file an information return with the IRS, reporting the value of any taxable fringe benefits they provide to their employees. If the employer fails to file the information return, they may be liable for a penalty.
To help avoid this situation, employees should be aware of the types of fringe benefits that are taxable. The IRS publishes a list of taxable fringe benefits on its website here: https://www.irs.gov/taxtopics/tc430. Further, you may want to ask your employer about the tax implications of any fringe benefits offered. The employer should be able to provide the employee with information about the tax implications of any fringe benefits offered.
If you are concerned your company is reporting the correct information; you should keep track of the value of any fringe benefits received so that they can be reported correctly on your tax return.
Conclusion
As an executive seeking to navigate the intricate realm of employee perks and benefits, it is natural to feel hesitant when contemplating their inclusion in your compensation package due to the murky waters of tax considerations we just discussed. However, it is imperative to recognize that perks and benefits are integral in maximizing your total executive compensation, and their impact can extend far beyond mere monetary value.
Embracing the array of available perks and benefits can be a strategic move, as they enhance your financial well-being and offer invaluable opportunities for professional growth and networking. By taking advantage of executive-specific perks, such as exclusive memberships and elite clubs, you gain access to a coveted sphere of industry leaders. This privileged network can foster valuable relationships, leading to new business opportunities, partnerships, and career advancements.
While the tax implications of perks and benefits may raise concerns, understanding these complexities will empower you to approach negotiations with clarity and foresight. Engaging in open communication with your organization about these considerations can lead to a more transparent and mutually beneficial agreement.
Frequently Asked Questions (FAQ)
Q: What are some common executive perks and benefits?
A: Executive perks can include luxury company cars, health and wellness programs, exclusive memberships, tickets to events, educational assistance, and flexible work arrangements.
Q: Why are perks and benefits important for executives?
A: They are crucial for attracting and retaining top talent, offering non-monetary compensation that enhances an executive’s lifestyle, provides professional growth opportunities, and can be a strategic tool when salary increases aren’t feasible.
Q: What are the tax implications of executive perks?
A: Many perks are taxable and must be reported as income. The value of these benefits, often the fair market value, is subject to income tax withholding and employment taxes. Executives and employers must understand these implications to avoid penalties.
Q: How can executives negotiate for perks?
A: When salary increases aren’t an option, executives can propose perks that offer similar benefits. It’s crucial to approach negotiations with an understanding of the company’s budget and to propose perks discreetly and professionally.
Q: What legal considerations should be kept in mind regarding perks?
A: Written approval should be obtained for gray area items to protect against potential audits and terminations. For educational assistance, understand any service requirements and the binding nature of agreements.
If you have any questions about perks or benefits, about any other form of equity compensation or want to explore how a Flat-Rate Fee-Only structure can help you achieve your goals, set up a time to talk.
Your financial well-being is too important to leave to chance. Choose wisely.
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