This excerpt taken from the DTV DEF 14A filed Apr 21, 2008.
What is the impact of the accounting and tax treatments of the particular form of compensation?
The primary elements of executive compensation are generally considered taxable income to the executive and compensation expense to the Company when earned. However, under Section 401-K of the Code, which applies to the 401-K Plan, and Section 409A of the Code, which applies to the Excess Plan Savings Benefit, the Excess Pension Plan and the Executive Deferred Compensation Plan, executive and Company contributions to the plans are not treated as current income to the executive and the related income taxes are deferred until the amounts are paid out to the executive, typically upon termination of employment. Further, for tax purposes, the Company defers recognition of the compensation expense for the executives' contributions to the Section 409A plans until payout. For accounting purposes, we record compensation expense for RSUs and stock options on a straight-line basis over the service period of up to four years based upon the fair value of the award on the date approved, and adjusted for anticipated payout percentages related to the achievement of performance targets in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," or SFAS No. 123R. For tax purposes, the compensation expense is recognized when the RSU is issued or the option exercised.
The Committee has considered the potential impact of Section 162(m) of the Code on compensation decisions. Section 162(m) disallows a tax deduction by the Company for individual executive compensation exceeding $1 million in any taxable year for each of the chief executive officer and the other three highest compensated senior executive officers, excluding the chief financial officer. Performance-based compensation under a plan that is approved by the stockholders of the Company and that meets certain other technical requirements is excluded from the $1 million limitation. The
annual bonus, the RSU and the stock option programs are intended to meet the performance-based compensation requirements, while base salary and perquisites do not. Based on these requirements, the Company has determined that it is entitled to a tax deduction for compensation paid to executive officers during 2007, other than the base salary and perquisites for Messrs. Carey and Churchill in excess of $1 million each.
While accounting and tax treatment are relevant compensation issues, the Committee believes that stockholder interests are best served by not restricting flexibility in designing compensation programs, even though such programs may result in certain non-deductible compensation expenses. Accordingly, compensation arrangements for certain elected officers that are not fully deductible have been considered by the Committee from time to time, and may be considered in the future. Also, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m), we can give no assurance that compensation intended to satisfy the requirements for deductibility does, in fact, do so.