Why Your Employer Loves Giving Perks

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BOSTON (MainStreet) -- Unemployment rates may be high and layoffs abundant, but for many companies -- especially those reliant on technical expertise -- retaining employees is crucial.

Attracting and retaining the best is also often the reason given by companies for the staggeringly high pay drawn by top executives, although in some cases there's another factor to be considered: High CEO pay can actually lower corporate tax bills, says a study released today by the Institute for Policy Studies.

"Ordinary taxpayers should not have to foot the bill for excessive executive compensation," its report reads. "And yet they do -- through a variety of tax and accounting loopholes that encourage executive pay excess. These perverse incentives add up to more than $20 billion per year in forgone revenue. No meaningful regulations currently limit how much companies can deduct from their taxes for the expense of executive compensation. The more firms pay their CEOS, the more they can deduct off their federal taxes."

At lower levels there are other reasons for employee perks, namely that salary alone isn't all it takes to keep valued employees happy, productive and within the fold. Employee benefits and specialized, beyond-the-norm perks are appreciated not just by workers, but by the companies offering them in part because by offering everything from gourmet meals to child care and laundry services, companies find employees are happy to blur their work and personal lives. Possibly even better than the induced antiquating of the 40-hour workweek is that on-the-job perks can often bring tax savings that straight salary increases cannot.

For decades, the tech industry has raised the bar for employee benefits. In many ways, the standard bearer is Google, a position reflected on the recruitment page Google offers prospective employees.

"The goal is to strip away everything that gets in our employees' way," Executive Chairman Eric Schmidt writes. "We provide a standard package of fringe benefits, but on top of that are first-class dining facilities, gyms, laundry rooms, massage rooms, haircuts, car washes, dry cleaning, commuting buses -- just about anything a hardworking employee might want. Let's face it: Programmers want to program, they don't want to do their laundry. So we make it easy for them to do both."

Among the benefits for Google's nearly 25,000 full-time employees are the usual offerings of health and dental insurance, company stock and 401(k) matches.

The perks also get more creative. Parents on maternity or paternity leave can expense up to $500 for takeout meals during the first three months they are home with their new baby. The company matches contributions of up to $12,000 per year from employees to nonprofit organizations and will reimburse those trying to adopt a child up to $5,000 in expenses. Chefs provide meals in campus cafes, and in-between snacks are gratis.

There is also an on-site doctor, physical therapy and chiropractic services, financial education, oil change and car wash services, dry cleaning, massage, a gym/fitness center, hair stylists and bike repair.

Facebook is another company with a reputation for top-notch benefits, and it has adopted a strategy similar to Google's to help lure away talent.

The company pays 100% of employee benefit premiums for medical, dental, vision, life insurance and disability coverage. It too boasts of having a gourmet-worthy cafeteria (in fact, it hired away Google's one-time chef) and adds the Friday afternoon bonus of beer kegs and nachos. Facebook's new headquarters in Menlo Park, Calif., also includes a movie theater, barbecue pit, on-site doctor's office and laundry service.

The actual cost of these offerings aren't typically detailed in public filings. It has been estimated, however, that Google spends at least an annual $2,000 per employee on food. To offer some perspective, in 2008 Cisco altered its policies on free food after determining it was spending $20 million a year on soda and bottled water alone. Google that same year revised its day care program after realizing it was subsidizing each child roughly $37,000 a year, nearly three times the average of similar companies.

Taxes are a concern for all involved, and companies often need to find ways to make the burden of extra compensation more palatable to either themselves or the beneficiaries.

In January, when all Google employees got holiday bonuses, they were structured in such a way that the company effectively paid the taxes. Increasing compensation to even out taxes was also done when Google announced recently that it would bridge a federal tax gap faced by same-sex couples, but not opposite-sex couples, on spousal health insurance benefits.

In many other situations, the companies themselves save on taxes by shifting payroll -- and the levies assessed on it -- to fringe benefits. The result can mean that employers actually get a deduction for "paying" more.

"As a general rule, fringe benefits are taxable to the employee and deductible by the employer," says Mark Luscombe, the principal federal tax analyst for CCH, a Wolters Kluwer business that provides tax, accounting and audit information, software and services. "However, there are broad categories of fringe benefits that are not taxable to the employee, even though they are still deductible by the employer."

These categories include meals, de minimis benefits -- those broadly defined as being of relatively small value by the IRS -- employee awards, discounts, working-condition fringe benefits, some transportation benefits, qualified moving benefits, athletic facilities, adoption assistance, education benefits, dependent care and financial counseling.

"Properly structured, health and life insurance plans can also be nontaxable to the employee," Luscombe adds. "Employers usually try to offer fringe benefits that they can treat as nontaxable to the employee. Fringe benefits generally must also be available to all employees to be nontaxable, rather than to just key employees or executives. Dollar compensation is always taxable, so fringe benefits can be more attractive to an employee that would otherwise have to pay for the same benefit out of his or her own pocket with after-tax dollars, while providing the same deduction to the employer."

Companies have shown themselves to be particularly creative -- at least from a tax perspective -- when it is executives reaping added benefits.

Employee perks started to come under scrutiny earlier this decade when the SEC tightened disclosure rules.

In particular, the benefits tendered to executives -- current and retired -- raised a red flag. Among them were the discovery during former GE CEO Jack Welch's divorce that the company gave him the post-retirement perk of an $80,000-per-month Manhattan apartment, the lifetime personal use of company jets and courtside seats to NBA and Red Sox games. Also controversial was the uncovering of Tyco's former CEO Dennis Kozlowski being granted a $2.5 million Manhattan apartment as a fringe benefit.

In 2006, the SEC revised the disclosure requirements regarding executive compensation. If the total amount of a "perk" exceeds $10,000, each item must be detailed and financially quantified. Taxable fringe benefits, according to the IRS, are accounted for at fair market value.

Despite SEC scrutiny, companies have been adept at finding ways to minimize their taxes while boosting compensation and perks.

The Institute for Policy Studies report says 25 of the highest-paid CEOs took home more in pay than their companies paid in income taxes last year. International Paper, Prudential, GE, Verizon, Bank of New York Mellon, Stanley Black & Decker and Boeing are among the companies on its list.

And as to the claim that high CEO pay lowers corporate tax bills?

One way this happens, the group says, involves stock options.

In annual shareholder financial reports, companies record an expense for the value of the stock options granted to executives. This book expense is based on assumptions about when the options will be exercised and the stock's trading price on those future dates.

Companies do not take the deduction for executive stock options on their tax returns until their executives exercise the options, usually years later. The amount of compensation the executive gets on the exercise date is "often substantially more than the book expense of the options that was originally estimated," the report says. Because the tax deduction is based on the trading price of the stock on the actual exercise date, the tax deduction is often much more than the book expense that was recorded by the companies.

"They do not write off the added option expense on the profit statement for shareholders," IPS says. "The result: Earnings reported to shareholders end up overstated and taxes end up reduced."

The Ending Excess Corporate Deductions for Stock Options Act, introduced recently in the U.S. Senate, would limit corporate tax deductions to the amount expensed for financial statement purposes at the time of the option grant. Closing this loophole would add $25 billion to federal tax revenues over 10 years, supporters say.

Another of the loopholes pointed out in the IPS report: "To prevent corporations from deducting excessive executive pay off their taxes, Congress in 1993 set a $1 million cap on the individual executive pay corporations could deduct. But that cap did not apply to 'performance-based' pay, a giant loophole that exempted stock options and other pay incentives from the cap."

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