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Ultimately, when compared to Home Depot and Lowe’s, during
TYE 1998, Menards was a small company that experienced less
substantial revenue growth but generated a comparatively high
return on equity. Considering the emphasis of the Court of
Appeals for the Seventh Circuit on investors’ returns in Exacto
Spring Corp. v. Commissioner, supra at 838-839, in arriving at a
reasonable amount of compensation, we attribute the most
importance to Menards’s comparatively high return on equity. We
conclude, therefore, that as the home improvement retailer with
the highest return on equity, Menards’s CEO’s compensation should
be the highest value within the range of its direct competitors’
CEOs’ compensation.
Although Home Depot generated a higher return on equity than
Lowe’s did during TYE 1998, the amount of compensation that the
CEO of Lowe’s received was approximately 2.13 times higher than
the amount of compensation that Home Depot’s CEO received. Due
to this lack of correlation between the rates of return on equity
and the CEO compensation of Menards’s direct competitors, we
calculate a reasonable amount of compensation for Mr. Menard in
the following manner:
16.1 (HD ROR) = 18.8 (M ROR)
$2,841,307 (HD Comp) $ (M Comp)
M Comp = $3,317,799 x 2.13 = $7,066,912
Consequently, Menards is entitled to deduct $7,066,912 as
compensation paid to Mr. Menard during TYE 1998.
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