In January, we wrote on the SEC reporting requirements applicable to the setting of future, and payment of current, incentive bonuses (Incentive Bonus Reporting on Form 8-K). We intended to follow-up quickly on that posting with this one, but a pile of proxy statements intervened. Here is the important follow-up (better late than never).
Closely related to the issue of reporting annual incentive payments and usually occurring at the same compensation committee meeting, are the tasks of setting performance goals for the current year’s incentive plan  and certifying the results of last year’s performance. To satisfy Code 162(m), within the first 90 days of the performance period, the compensation committee must approve performance goals for the period and certify that the company has achieved the performance goals it had established for prior periods (2016 for short-term incentive plans and 202014-2016 for many long-term plans). Generally, the incentive plan payout for the recently completed year  must be made by March 15, to comply with Code Section 409A.
Therefore, the February/March compensation committee meeting of most companies should have at least the following four agenda items.
Setting/Approval of Current Year Goals/Awards:
- For the 2017 cash incentive awards, the committee needs to set the applicable goals. Note that many companies have designed their plans so that a “162(m) Pool” is automatically established each year. For those companies, no further action would be required by the committee for 2017 annual cash awards, although most committees would establish performance goals for the underlying plan, under the plan-within-a-plan structure.
- If the compensation committee is making performance-based equity awards in 2017 Q1, it needs to set the goals for those awards. However, this may not necessarily require any action in addition to approving the award agreement.
Certifying the Achievement of the Prior Year’s Goals:
- For the annual cash incentive awards earned in 2016 and payable in 2017, the committee should pass a short resolution certifying that the performance goals establish in early 2016—or automatic under a 162(m) plan—were achieved.
- For any performance-based equity awards with a performance period ending December 31, 2016, the committee should certify that the performance goals for those awards were met (or not).
Committee certification is one of the express requirements of Code Section 162(m).