Independent Investor Test

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Term: Independent Investor Test

Definition:This test considers the return on investment indicated by the increase in the value of a corporation’s stock along with dividends paid during the time period in question. It looks at the company’s performance throughout the year to determine if the compensation to key employees is reasonable. Basically, an “independent” investor should be happy with the return on his/her investment and not object to the compensation paid to key employees. The rate of return must be high enough to warrant their pay.

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CoursePage Number
12 - IRS Reasonable Executive Compensation 20
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