What does the IRS typically consider when assessing the reasonableness of executive compensation?

The IRS evaluates the reasonableness of executive compensation by considering various factors, with a primary focus on how well the compensation aligns with industry standards and typical compensation levels for similar roles. This involves analyzing what other companies in the same industry pay for similar positions, which helps ensure that the compensation package is reasonable and not excessively high or disproportionately low compared to peers.

This approach reflects the IRS's concern that excessive compensation could be used as a means of tax avoidance, particularly for corporations claiming deductions for these expenses. By measuring compensation against established benchmarks within the industry, the IRS ensures that companies are not unfairly inflating executive pay in a way that does not correspond to market realities.

The other options either narrow the scope too much (focusing only on years of service or just the company's performance in a single year) or consider irrelevant factors (like the personal preferences of the executive), which are not generally included in the IRS's assessment process.