Section 162(m) of the Internal Revenue Code generally limits the deductibility of compensation paid in excess of $1 million to the chief executive officer and the three other highest compensated officers (other than the chief financial officer) of a public corporation with securities registered under Section 12 of the Exchange Act. However, payments of certain commissions and “qualified performance-based compensation” under Section 162(m) are not subject to this limitation.
As previously reported in our ERISA Practice Center Blog (see here and here), bills to expand the scope of Section 162(m) and/or to narrow or eliminate the exceptions under Section 162(m) have been proposed in recent years, but have not become law.
Recently, a new coalition named “Take On Wall Street” that is comprised of lawmakers (including Senator Elizabeth Warren (D-MA)), union leaders, civil rights groups, and other community groups has announced plans to pursue five initiatives, one of which is to “end [the] tax exemption for huge CEO bonuses.”
In doing so, the coalition has pledged its support to “The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act” (H.R. 2103 and S. 1127). The House Bill was introduced by Congressman Lloyd Doggett (D-TX) in April 2015 and is currently in the House Committee on Ways and Means; the Senate Bill was introduced by Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) in April 2015 and is currently in the Senate Committee on Finance. Specifically, the Bills would amend the Internal Revenue Code by:
- Eliminating the existing Section 162(m) exceptions for commission payments and qualified performance-based compensation;
- Including all current and former employees (not limited to the chief executive officer and the three other highest compensated officers) within the scope of Section 162(m); and
- Expanding the scope of Section 162(m) to include public companies subject to periodic reporting under Section 15(d) of the Exchange Act. The practical effect would be to expand the application of Section 162(m) to voluntary filers.
While previous bills to expand Section 162(m) and/or to narrow or eliminate the exceptions to the limitations under Section 162(m) have not gotten much traction, political scrutiny on executive compensation is certain to continue during the 2016 election year and beyond.