August 25,2006

Grassley: Hearing to Explore Executive Compensation Abuses, Stock Options Backdating


To: Reporters and Editors
Re: Hearing on executive compensation including stock options backdating
Da: Friday, Aug. 25, 2006

There have been a number of recent newspaper stories about corporate executives finding
ways to compensate themselves to skirt the federal tax on compensation that is not performance-based.

The most well-publicized of these methods is the backdating of stock options, in which
executives wait until after the fact to pick a date for their stock options, then pick the low point of
the stock during the year to maximize their profit. The tax code governs certain aspects of executive
compensation and imposes a tax unless the pay (more than $1 million) is performance-based
compensation. In response to the tax, there has been a big upswing in stock options to compensate
corporate executives. In June, Sen. Chuck Grassley, chairman of the Committee on Finance, with
jurisdiction over taxes, convened a hearing to explore various compliance concerns in the corporate
tax arena and asked the Justice Department’s witness to explain the agency’s investigation of stock
options backdating.

Chairman Grassley will convene a hearing exclusively on executive compensation on
Wednesday, Sept. 6, at 10 a.m. in 215 Dirksen Senate Office Building. The working title is,
“Executive Compensation: Backdating to the Future/Oversight of current issues regarding executive
compensation including backdating of stock options; and tax treatment of executive compensation,
retirement and benefits.” The first panel will include the Justice Department deputy attorney general;
IRS Commissioner Mark Everson; and a senior official from the Securities and Exchange
Commission. This panel will focus on the government’s response to stock options backdating and
other issues regarding executive compensation, including 162(m) -- the million-dollar deduction rule
– as well as transparency issues. The second panel will consist of academics and interested groups,
giving additional perspective on backdating and 162(m) as well as providing an overview of
executive compensation, retirement and benefits, and how they are treated under the tax code.
Chairman Grassley is exploring the extent of abuse of executive compensation tax restrictions with
an eye toward possible legislation. He made the following comment on the issue.

“It’s one thing for an executive to make big profits because he’s improved his company, but
it’s a whole different thing to make big profits because he’s playing fast and loose with the books.
Outside the corporate suite, Americans don’t get to pick and choose how much of their employerprovided
income is taxed. Their employers report their salaries to the IRS and that’s that. It’s
frustrating to think that after the corporate scandals of recent years, some executives are still looking
for ways to take unfair advantage for personal gain. On top of that, it looks as though boards of
directors are approving bad deals without shareholder approval. On the backdating of stock options,
the federal government needs to take a hard look at that problem. I continue to ask federal officials
to let me know whether the current tax laws are adequate to rein in and prosecute stock options
backdating. If the tax laws are inadequate on stock options backdating, I want to beef them up.

“At the September 6 hearing, I’m especially interesting in hearing the panelists’ views on the
adequacy and the appropriateness of the current tax treatment of executive compensation, including
perks and retirement benefits. I want to find out more about the effectiveness of the tax code, as
well as how improved transparency for shareholders could address concerns about executive
compensation abuse.”