Ramon has finally arrived. He has interviewed for the CEO position with MMM Corp

Question

Ramon has finally arrived. He has interviewed for the CEO position with MMM Corporation. They have presented him with two alternative compensation offers. Alternative 1 is for a straight salary of $2,590,000. Option 2 is for a salary of $1,090,000 and performance-based compensation of up to $2,000,000. Assume that Ramon has a marginal tax rate of 40 percent and MMM has a marginal tax rate of 35 percent. Answer the questions under each of the following alternative scenarios.

a. What is MMM’s after-tax cost of providing Ramon with Option 1?

b. What is MMM’s expected after-tax cost of providing Ramon with Option 2 if it believes there is a 40 percent chance Ramon will qualify for the performance-based compensation?

Explanation / Answer

a) MMM's after tax cost of providing Ramon with option 1

Option 1 (1,090,000 X (1 -35) + (1500000 X (1-0) = $2208500

(salary paid up to the 1,090,000 limit X (1 - MMM's marginal tax rate) pluss all of the remainder (2590,000 - 1,090,000)

b) option 2 - (1090,000 X (1-35) + (2,000,000 X (1 - 35) X 40% = 1228500

salary paid upto the 1090,000 limit X (1 - MMM's marginal tax rate ) plus the 2M (1- MMM's marginal tax rate) times X 40%

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.