VisionLink Blog

Tom Miller

High Income Taxes—Should You Change Your Compensation Strategy?

Income taxes increased dramatically in 2013 for high income earners. Is there any bright side to higher taxes? No! But let’s talk about how the right compensation strategies can minimize their impact.

Top earners are now in a 39.6% marginal bracket. Add state taxes (for most states)-let’s assume 5.05%. (Wouldn’t that be nice Californians and New Yorkers?) Then add the Medicare tax on income over $113,700-2.35%. That adds up to a true marginal rate of 47.0% on the top dollars earned by high achievers. Ugh!

Let’s consider some compensation strategies that will help creative employers offer relief to their top earners. There are several, but let’s look at two examples for now.

First, revisit deferred compensation plans (DCP). These plans allow high earners to voluntarily defer parts of salary or bonuses and postpone taxes to a future date. Deferring to the future offers several immediate benefits:

In addition, assuming the same tax rates in the future as today, deferred dollars almost always result in larger after-tax values in the future (given the same growth assumptions inside the DCP as in an outside investment account).

Second, beef up long-term incentives. Employees may be pleased to exchange some of their incremental “53 cents on the dollar compensation” for long-term equity or phantom stock. Or, a smart employer may simply add such a plan to existing promises. Let’s consider phantom stock. Grants received today equal a financial stake in the future company with no current tax! That’s right. You can give me 1%, 5% or 10% of your company “value” through phantom stock and I will incur no taxes today. What happens when the shares are redeemed in the future? Yes, taxes. However, we might be able to move payments into lower tax years, or spread them over time. In other words, we can often find ways to move the reportable income into periods where the employee may fall below the tax maximizing thresholds discussed above.

But here’s my main point: Employers that explore and implement techniques to help high income earners reduce, avoid or delay taxes are offering a benefit that just went up in value thanks to Washington. Don’t let your key employees be lured away because your competitor adopts these ideas before you do.

No Comments »

No comments yet.

Leave a comment

* Will not be published


"VisionLink has helped us successfully navigate a number of complex issues regarding our rewards programs. It has dealt with all facets of these varied issues with a high degree of competence, integrity, and straight forward advice. VisionLink's experienced team has consistently delivered first class results in a timely, professional manner and has become a valued Storm partner."

Thomas K. Grzywacz
President/Chief Executive Officer
Storm Industries, Inc.

"VisionLink has helped us successfully engineer a long-term incentive plan that has empowered our company to reward and retain key talent while increasing shareholder value. The knowledge, patience and deep experience of its team members helped us navigate a road that was unfamiliar to us. Ultimately, VisionLink designed a plan that met the high standards of both stockholders and key management employees. We have further engaged VisionLink to address our business succession and transition planning needs."

Reggie Dupre'
Chief Executive Officer
Dupre Logistics

"Over the past several years, National Technical Systems has engaged VisionLink to provide insight and direction on a number of executive compensation issues, as well as a performance evaluation of our 401(k) plan. Under its direction, NTS completely revamped executive level rewards to align with our business growth objectives and the strategic plan of the company. VisionLink's insight and direction have been invaluable. NTS has achieved its growth objectives and our executives feel appropriately rewarded for their performance."

Bill McGinnis
President/Chief Executive Officer
National Technical Systems

"VisionLink arrived on the scene just in time for us. We needed a new framework for our short-term and long-term incentive plans. VisionLink's modeling and forecasting process broadened our horizons and expanded our view of how to use a good incentive system to build, retain and strengthen our senior management team. We remain impressed by their expertise, professionalism and great service."

James Keng
Jimway, Inc.

"Our firm has had a long-term incentive plan for over eight years but we never quite felt like it was firing on all cylinders. We hired VisionLink to re-energize our plan, and they did it! We now have a cohesive awards strategy that's fair to shareholders and valued by our employees. VisionLink's team is technically skilled and very creative. We're happy to recommend VisionLink to firms looking to upgrade their management incentive programs."

John M
FTO Inc.

"Our company was like VisionLink's typical clients. We were great at sales and haphazard at how we compensated our people. VisionLink's process brings great clarity and confidence to our growth planning - and makes compensation a great growth capability."

Dan Sullivan
Founder and President
Strategic Coach ©

"The team at VisionLink helped our company structure a long-term incentive plan that parallels the company's strategy for continued growth as a global market leader within our industry. Their approach resulted in a program that our corporate team and executives embraced on both a professional and personal basis. Through VisionLink's guidance and execution, we were able to create both a motivational tool for current team members and a recruiting device to attract future executive level associates. Well done!"

Mark Rhoades
Fluidmaster, Inc.

"As a leading direct seller of scrapbook photo albums and supplies, Creative Memories has independent consultants across the country. And for over six years now, VisionLink has helped us to stay connected and administer a voluntary 409A non-qualified plan for them. VisionLink has provided support for all aspects of our plan from notification of eligibility through registration and distribution. The VisionLink support team has offered suggestions for improving processes and provided us with outstanding service year after year."

Guy Walker
Creative Memories North America

JOIN OUR MAILING LIST and get webinar invites, montly newsletters and free advice from business growth experts

Drive Growth - Increase Value - Multiply Wealth