Maximum Reasonable Compensation
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In the IRS determination of reasonable compensation for owner-managers, one of the main considerations is that of comparable salaries. Maximum reasonable compensation would be the highest amount of compensation, both wages and bonus, which would be allowable to be used as a business expense for services rendered in comparable circumstances. Based on IRS cases, ERI developed the definition in terms of the standard error of the distribution of compensation for comparable executives that, up until January 1, 2004, was 3.01 standard errors. In late 2003, because of communication with individuals involved in new IRS efforts including Intermediate Sanctions and Sarbane-Oxley, this amount was dropped to 2.01 standard errors. Very similar to the standard deviation, the standard error represents the range of pay in which one might find approximately 90% of the population in a skewed distribution.
For more information, see www.eri-executive-compensation.com. |