Letter from the CEO

Dear Fellow Corporate Associate:

We have just closed out our third consecutive year of great achievement and accomplishment, putting our company on much more solid ground with a total of 220 contracts including seven wholly owned hotels and 47 joint venture properties. This is a long way from where we were back at the beginning 2005. There is real momentum within the company today as a result of your hard work and dedication to our strategy and goals.

Unfortunately, the economic environment we find ourselves in today is one of huge challenge and uncertainty. Who would have ever thought six months ago that a great organization like Bear Stearns would experience such a dramatic meltdown in a matter of days? Who would have predicted the headwinds all major banks and financial institutions are currently facing or the upheaval of the credit markets? I certainly did not anticipate this and I suspect you didn’t either. Some predict we will be in a recession very shortly if, in fact, we are not already there. I have no idea what lies beneath the surface, but I do know that we, all of us at [redacted], should assume the worst while hoping for the best.

The first two months of the year were in line with budget; however, March has softened rather dramatically and we remain concerned about future periods given the economic uncertainty. History tells us that our industry usually feels the real impact of an economic slowdown a few months after most other industries. I do not want to wait until the “horse is out of the barn” before we take prudent measures to mitigate a possible serious downturn. We have all worked too hard to let the progress we have made and credibility we have earned slip away. It is far better to err on the conservative side than to wait until our opportunity to prepare is gone.With this in mind, I have asked the Executive Committee to take certain actions to freeze or reduce expenses over the next few months. Effective immediately, we will freeze hiring unless approved by me, reduce travel expenses, delay some purchases, and implement other steps to ensure that we will be in a position to meet our commitment to our shareholders. As part of this program, I am delaying the implementation of corporate merit increases that are normally effective the 1st of April. We will look at our business levels and the direction of the general economy as we get further into the second quarter in order to evaluate when and if we will be able to implement this year’s annual merit increases. The manager level and below will be the first group to receive their increase while director level and above will be asked to wait longer. I fully understand that this is a serious measure to take, but I also believe that all our associates are committed to the long term success of [redacted] and this action, in my opinion, is a key element to the continuation of this success during these uncertain economic times. We all read the same newspapers, listen to the same news programs, and we all have witnessed first hand the changing economic environment, so I ask you to support this decision.

You have my word that we will revert back to a more normal operating mode as soon as we see positive signs in the economy and our business. In the meantime, I appreciate your continued hard work, loyalty, and dedication to [redacted] mission and goals.

[Redacted]

Chief Executive Officer

[Redacted]

My comments

1. As the company is in an industry (hospitality) which is a lagging indicator of the economy, this move is a bit premature and unnecessary (if you ask me). The entire reason for working in the hospitality industry is that it does not wildly fluctuate with the economy. If you were assign the hospitality industry a beta, it would hover somewhere around 0.30. When the company released its earnings earlier this month, the company actually beat forecasts for the 1st quarter of 2008, yet the CEO calls this drastic action necessary. Necessary to what? Necessary for what? It is clear that the company is in a healthy state: with sufficient cash flow and EBIDTA (take my word for it). Why the entire executive committee believes this is a necessary solution is short-sighted?

2. People are reactionary, and people react to the news they see and/or hear. This statement from the CEO sends exactly the wrong message. Everyone knows the general state that the economy is in right now, but when the company start to revise its forecast, then the workers start to believe the company is trying to hide some skeleton or delay some inevitable disastrous news. (Images of Enron shredding corporate documents quickly flash across my mind). I don’t believe that is the case with the company, but sending a message like this company wide proclaims a signal of the doom and gloom to come. A publicly traded version of the boy who cried wolf?

3. The company is doing quite well. The company was among the biggest price gainer on 3/25/08. Therefore, we, the associates are only left to feel that the company is more interested in shareholder equity than its associates. While a company that focuses on shareholder equity is not discouraged (it’s actually encouraged), it would be a bit pollyannaish for a company to focus on maximizing equity at the cost of its associate. Let’s face it, in the hospitality industry, people (workers) matter, and if the workers stop believing in the services they offer, profits will be sure to decline.

(I will look into providing the stock chart for the company. I will have to work to redact certain portions to keep the identity of the company confidential)

4. This destroys moral. I don’t even think this needs any special explanation. I personally know of lots of understaffed department (mine included) that cannot possible take kindly to the message. A hiring freeze and a postponement of annual merit increase: a double whammy.

I could think of more comments, but I’ll stop here. I don’t think there’s any need to continue. While I’m sure the executive committee had their reasons for their decision, I do feel it to be the incorrect one.

Bonuses: Another reason why I support a reformation of the US Tax Code

I’ve never been a huge fan of the US Income Tax Code or the IRS which was placed in charge of enforcing and collecting under the tax code. Any tax code that requires pages upon pages of explanation can not possibly be the most effective and/or efficient way to tax the population. Instead of listing thousand of examples of why I view the tax code as unnecessarily complicated, I’ll talk about an example that hits closer to home. This is the issue of how the tax code is applied to a bonus check and why the calculation unnecessarily overtaxes the bonus.

Bonuses are taxed in one of two ways: The Percentage Method and the Aggregate Method. For the percentage method, the bonus is taxed at a flat rate of 25% at the federal level as well as a flat tax at the state level (rates vary by state). It doesn’t matter what the tax payer’s effective tax bracket was the last paycheck, the percentage method applies a flat rate to the bonus. The other method, and the one most in use, is the aggregate method. Here, the bonus is treated just as any other paycheck and taxed at the then current withholding the tax payer had selected earlier in the year. While this sounds simple enough, it does get a bit complicated. First though, a brief lesson about how each tax payer’s income tax liability is calculated.

At any point in a year, but usually at the beginning or the start of a new job, a tax payer completes a W-4, which allows the tax payer to estimate their withholding (how much of their income will be shielded from taxation throughout the year) based on questions on the form. The form is used to estimate the federal tax liability the tax payer will have at the end of the year. Once this is complete, the IRS starts applying the withholding rates on subsequent paycheck and taxes any amounts not shielded by the withholdings. The amounts are automatically withdrawn from the tax payer’s paychecks before receiving it. At the beginning of the next year, up until April 15, the tax payer has to complete a tax return which applies the year’s federal tax rate to the actual income earned that year (as stated on the W-2 and other income forms) and reconciles this tax liability with the estimation that has been withdrawn throughout the year. If the amount taken out during the year is less than the calculated amount on the tax return, the tax payer sends a check to the IRS, if more the IRS returns a check to the tax payer. Are you still with me?

Where the complication arises with bonuses is that the estimated tax liability is calculated per paycheck over the course of the year. This paycheck is taxed under the assumption that every subsequent paycheck will be similar, if not identically. Of course, everyone is well aware that bonus paychecks are quite sizeable when compared to weekly/biweekly paychecks since the bonuses are one-time payments and not a recurring paycheck.  A simple example will shed some insight on why this creates an estimation nightmare.

If I am paid $2,000 biweekly, the IRS (rather the accounting software in place) would compute my tax liability by applying the $2000 over the course of the year or twenty six times (26 paychecks during the year if paid biweekly). $2000 * 26 = $52,000 annual salary. The IRS then applies the tax rate and my estimated total tax liability during the year becomes $4,386.25 plus 25% of the amount over $31,850 or $9423.75* (18% effective tax rate). This amount is then reduced to a single paycheck (divided by 26) and $362.45* is taken out the individual paycheck. If nothing changes and I receive the same amount over the course of the year, the estimated tax liability will reconcile with the actual calculation using the W-2. The problem occurs when I receive a bonus and the IRS taxes it. The IRS (once again, it’s really the accounting system in place) treats the bonus as a paycheck, and not as a one time payment. A bonus of $6,000 would also be applied with the same formula and $6,000 * 26 = $156,000. When the tax rate is applied, the amount owed on income of that magnitude would be $15,698.75 plus 28% of the amount over 77,100 or $37,790.75. Applied over a single paycheck, the tax liability would be $1,453.49*. This number grossly exaggerates the amount of taxes that needs to be paid and pushes the tax payer to a marginally higher tax bracket. At the end of the year, the tax filer actually report income of $58,000 ($52,000 base and $6,000 bonus) which should only have been taxed. Since the bonus paycheck actually estimated an end of the year income of $156,000 (albeit only once during the year), a greater proportion of taxes would have been collected by the government that the tax payer is actually responsible for remitting. This over estimation will be reflected in the over taxation of the bonus paycheck.       

The bonus check is effectively overtaxed, and while this money will be later returned to the tax payer, the IRS keeps the funds until then. Not only does the IRS keep the funds until a tax payer can complete his/her tax return the next year, the funds are not adjusted for inflation nor do the funds interest while the government holds on to it. It’s basically a free loan made to the federal government that devalues each second the government holds on to it due to lost opportunity cost and rising inflation.

My bonus check just arrived last week, and thanks to the IRS shoddy math, it’s effectively taxed at around 50% (including state, local, and social security) even though I’m no where near the highest tax bracket (35%). The funds I can use to “stimulate the economy” (as the government puts it) have been unnecessarily withheld and the earliest I can consider receiving re-payment from the federal government will be in 2009. Thank you Uncle Sam.

P.S. I am actually contemplating completing a revamped W-4 and increasing my withholdings so I can correct this over taxation. This method will allow me to intentionally pay less in taxes than my project will necessitate so as to balance the over taxation of my bonus.

* In reality, only the first paycheck of the year is projected over 26 weeks. All subsequent payment accounts for the prior paychecks and so each subsequent paycheck will effectively be increased over the remaining pay period in the year plus the amount already taxed. To make the math simple (if at all possible), all tax computations were calculated as if applied to the first paycheck of the year.