Cutback vs Gross-Up Under 280G

The Clause You Skipped Past in the Offer Letter

Your offer letter has a change-of-control section you probably read once, nodded at, and moved past to the base salary line. It likely references "Section 280G" and either a "best-net cutback" or a "gross-up" — two phrases that sound like boilerplate until an acquisition actually triggers them, at which point they determine how much of your severance and accelerated equity you actually keep. One provision reduces your payment to avoid a tax. The other keeps your payment intact and has the company cover the tax. They are not interchangeable, and a comp committee negotiating your agreement knows which one costs the company more. By the end of this article, you will be able to read your own change-in-control clause, understand which mechanism it uses, and run the comparison that shows what each one means for your net proceeds.

What Section 280G Actually Triggers

Section 280G of the Internal Revenue Code governs "parachute payments" — compensation contingent on a change in ownership or control. The mechanics are specific: if the present value of an executive's parachute payments equals or exceeds three times the executive's "base amount" (roughly a five-year average of taxable compensation), the excess over one times the base amount becomes subject to a 20% excise tax on the executive, and the company loses its corresponding tax deduction on that excess, per Plante Moran's 2021 summary of the rule. This is the "3× base amount" threshold that shows up in nearly every change-in-control agreement, and it's worth understanding on its own terms — our companion piece on 280G and the golden parachute excise tax walks through the base-amount calculation in more depth.

The threshold matters because crossing it doesn't cost you a little — it costs you the excise tax on the entire excess amount, plus the company's deduction, in one step. That cliff is exactly why change-in-control agreements build in a mechanism to deal with it before it happens, and that mechanism is either a cutback or a gross-up.

Cutback: Trimming the Payment to Stay Under the Line

A "best-net cutback" (sometimes called a "modified cutback" or "safe harbor cap") reduces the executive's parachute payments to just under the 3× base-amount threshold — typically to $1 less than the trigger point — so no excise tax applies at all. The company then compares two scenarios: full payment with the excise tax deducted, versus reduced payment with no excise tax, and pays whichever produces the higher after-tax number for the executive. That "best-net" language is the executive protection built into most modern cutback clauses; without it, a straight cutback could theoretically force you to accept less than you'd net by simply taking the tax hit.

The mechanical result: your gross severance and equity acceleration get trimmed, but you owe no 20% excise tax, and the company keeps its full deduction. This is now the dominant structure in newly negotiated agreements, largely because boards and shareholder advisory firms treat gross-ups as a governance red flag.

Gross-Up: Paying the Tax So the Executive Doesn't Feel It

A gross-up provision does the opposite: the executive receives the full parachute payment, uncut, and the company pays an additional amount — the gross-up — sized to cover the executive's 20% excise tax liability (and often the additional tax on the gross-up payment itself, since that payment is also taxable income). The executive walks away with the same net amount they would have received had no excise tax existed at all. The company absorbs the entire cost: the excise tax, the gross-up payment, the tax on the gross-up payment, and the loss of its own deduction on the excess parachute amount.

Gross-ups were common in CEO change-in-control agreements a decade or more ago. They have become rare in new agreements because they can turn a moderate severance trigger into a very large, board-approved cash outlay with no cap — which is precisely the exposure a comp committee tries to negotiate away today. If your agreement still contains one, it's worth knowing that you are likely negotiating from an unusually favorable, legacy position.

A Side-by-Side Worked Example

The clearest way to see the cutback vs gross-up difference is to run both through the same inputs. This is a worked example using round, illustrative numbers — not a benchmark — to demonstrate the method; the actual base amount, multiple, and payment structure in any real negotiation come from your own filings and agreement.

Assume an executive's base amount (the five-year average) is $1,000,000, making the 3× threshold $3,000,000. Assume the executive's total parachute payment, if paid in full, would be $3,600,000 — $600,000 over the threshold.

Under a cutback: the payment is reduced to just under $3,000,000. No excise tax applies. The executive forgoes $600,000+ of gross payment but keeps 100% of what remains, net of ordinary income tax only. The company pays $3,000,000 (versus $3,600,000) and preserves its full deduction.

Under a gross-up: the executive receives the full $3,600,000. The $600,000 excess is subject to the 20% excise tax — $120,000 — which the company also grosses up for, along with the tax on that gross-up payment itself, pushing the company's true cost meaningfully above the $3,600,000 headline figure. The executive nets more than under the cutback scenario, but the company's total outlay is materially higher and its deduction on the excess is lost either way.

The number that changes the outcome — the base amount — comes from the executive's own W-2 history, and the number that determines exposure — the payment multiple applied to severance and equity acceleration — comes from the change-in-control agreement itself. Our golden parachute payment calculation example walks through building the base amount from real compensation history, and the underlying change-of-control severance multiple determines how large the payment is before any 280G adjustment happens at all — CIC cash severance for CEOs typically runs about 3× salary plus bonus, with other named executive officers closer to 2–3×, per CompensationStandards.com's 2007 analysis, and Alvarez & Marsal's 2022 review found the 2–2.99× cash multiple to be the most common structure, with accelerated equity vesting typically the largest single component of the total package.

Which Provision Should Be in Your Agreement

There is no universal answer — the right provision depends on your specific base amount, the size of your equity acceleration, and how close your total parachute value sits to the 3× threshold. A cutback protects the company from open-ended cost and is now the market-standard structure; a gross-up protects the executive from ever absorbing the excise tax personally but is increasingly rare and, where it still exists, is often a point a new board will try to renegotiate away at your next amendment or renewal.

What you can control is knowing which one governs your agreement today, what your own base amount and payment multiple actually are, and what your net outcome looks like under each scenario before you're in a live negotiation. That's a different exercise from generic market commentary — it requires your own filed compensation history, your agreement's specific multiple, and a side-by-side comparison run on your numbers.

A cutback and a gross-up can produce very different net outcomes from the identical severance package — the difference isn't the headline multiple, it's which side of the 280G line the payment lands on.

How to Verify Your Numbers Before You Negotiate

Before you rely on any of this in a real conversation, confirm your base amount from your own W-2 history, confirm the current excise-tax rate and IRS present-value assumptions with tax counsel, and read your agreement's exact cutback or gross-up language — provisions vary in how "best-net" is defined and whether the gross-up covers taxes on the gross-up itself. For the broader agreement context, our guide to how a change-in-control agreement is structured, and our piece on executive severance package negotiation, are useful next reads.

If you're heading into a renewal or an acquisition and need to see where your own multiple sits against comparable change-of-control structures, the Change-of-Control Multiple Benchmark Workbook walks through building that comparison against your own filed agreement terms.