Don't Mess With Taxes

One of the advantages of being a night owl is you get to see program reruns, like the Anderson Cooper piece last night that looked at how some corporate fat cats are making off like bandits when it comes to their taxes.

That's right, in addition to getting golden parachutes, these privileged former top execs don't even have to worry about paying the taxes on their multimillion dollar severance packages.

Although provisions of the tax reform act of 1984 impose an additional 20 percent tax on multimillion dollar golden parachutes given executives who are fired in a merger or takeover, reporter Randi Kaye noted that some companies are paying their departing execs' huge tax bills.

"When Circuit City's CEO lost his job last year, the company agreed to pay $1.6 million in taxes on his $3.6 million severance package," reported Kaye. "So the CEO didn't have to pay any taxes at all. That cost investors a bundle."

This process is known as grossing up pay. Essentially, the employer adds enough money to the worker's check to cover any taxes due from the added income. RiskMetrics Group, which advises shareholders, analyzed compensation from firms in the S&P 500 and found two-thirds of them willing to cover millions of dollars in taxes for top managers' severance packages.

In the interest of full disclosure, I've benefited from gross-up payments. When I worked for Nestlé and the company handed out bonuses, it would add enough extra to our paychecks so that we got the full value of our bonus amounts. Of course, grossing up pay so that a still-employed midlevel worker gets $500 more in spendable money is a lot different than adding even more millions to someone who's walking out the door with bagfuls of the company's money.

The good news is that folks are starting to get fed up with this. Kaye noted that some shareholders have petitioned companies to do away with the gross-up taxes. According to her report last night, MetLife has decided to eliminate the practice and Colgate has capped severance and done away with the gross-up provision, too. RiskMetrics says at least 10 companies in the S&P 500 have revised their severance agreements.

The bad news is that this is a long-standing practice and it probably will never go away voluntarily. So most companies, including some you may own stock in either individually or as part of a mutual fund, still plan to play millions in severance and taxes to fired executives.

To see how this has been costing taxpayers over the years, check out these previous stories: No, let me pay: Execs get tax help from CNNMoney, Dec. 22, 2005, and Helping Fat Cats Dodge the Taxman published in BusinessWeek, June 20, 2002.

Fat cat photo courtesy of Smile