I know that most of you are still preparing for your annual meeting of shareholders. However, since annual meetings usually mean a meeting of the Compensation Committee, this might be a good topic to get on their radar screen. After the annual meeting, Compensation Committees and the appropriate members of the Company’s legal, executive compensation, tax, and/or HR functions should quickly prepare to shift their focus to action items relating to new world of Code Section 162(m)—without a performance-based compensation exception. Needless to say, for many companies, the impact of losing the ability to deduct compensation amounts over $1 million per year per executive will be significant. And even companies that only pay one or more executives more than $1 million per year may face pressure to (at least) consider a change in compensation strategy.
Last month, I led a discussion of these topics/matters at the ABA Business Law Section Subcommittee (chaired by friend and fellow blogger Mark Borges). I suggested that those responsible for shaping the Compensation Committee’s agenda be prepared to quantify the impact of the change and bring issues and alternatives to the first committee meeting scheduled to occur after the annual shareholders meeting, in order to give the Committee time to act and react before year end.
In addition to quantifying the impact of the lost deduction,
- Carefully review and inventory all written compensation plans and agreements of any kind that conceivably could qualify for continued deductibility under the grandfathering provisions of the 162(m) transition rule.
- With the assistance (and maybe the opinion) of legal counsel determine which of the plans and agreements may qualify for grandfathered status under the “legally binding right” test of the transition rules.
- Preserve the 162(m) deductibility grandfathered status for all eligible plans and agreements.
- Consider compensation design and strategies that may help ameliorate the loss of the deduction for compensation over $1 million. I’ve posted some ideas before, but our list of possibilities has grown longer.
Of course, we don’t know precisely what the critical transition rule guidance from the IRS will look like yet, but you should be prepared to put proposals on the foregoing matters before the compensation committee at its first meeting after the annual shareholders meeting.