The golden parachute rules are intended to discourage excessive compensation payments to
executives in the event of a CIC by imposing negative tax consequences to both the company
and the recipient.
Under the rules, if the present value of a CIC payment to an executive exceeds
his/her “safe harbor” (that is, three times the executive’s average taxable compensation over the
five most recent calendar years preceding the CIC, less $1), the company loses tax deductions for
the amounts considered “excess parachute payments.” Additionally, the executive is required to
pay a 20% excise tax on the excess payment.
Commonly misunderstood, the penalties resulting
from excess parachute payments are calculated based on amounts paid in excess of one times the
executive’s five year average taxable compensation (base amount), rather than the amount in
excess of the safe harbor. 280g