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Interactive Exercise
We'll now show you how to use ERI's Executive Compensation Assessor tool to obtain maximum reasonable compensation data. You will use the Black Mesa Products information to complete this exercise.
Problem Statement
Andy and Loren's salaries aren't really up to the average of comparable companies' CEO's and CFO's. Over the years, Andy and Loren have tried to take as little as possible out of the company. This explains why their compensation appears so low. They re-invested part of the earnings into expanding the business. They also invested in real estate around Albuquerque. This year, their investing paid off. Andy and Loren sold a large piece of property at a profit of $675,000.
Now they are concerned about invoking the Accumulated Earnings Tax. They would also like to have this money for themselves. So, they looked at ways to get the money out of the corporation.
They seem to have 2 options:
- issue a dividend
- grant themselves bonuses
The dividend route is expensive since the money would be double taxed. So Andy and Loren have decided to grant themselves bonuses. Andy will receive $472,500, and Loren will receive $202,500.
Here's the question: Is this reasonable compensation for Andy and Loren?
Click on the Load Step-by-Step button to find out.
Remember: To view this exercise you will need the Adobe Acrobat Reader, which you can download from the Instructions page of this course. (Click on Instructions in the left-hand toolbar to access this download.)