As I have mentioned previously, we are developing a variety of strategies for restructuring future compensation packages to reduce the impact of the elimination of the performance-based compensation deduction—in addition to other planning opportunities under the Tax Cuts and Jobs Act. (I am sure other top tier executive comp professionals are doing the same and I look forward to sharing new ideas.) Today we list some possible action items for the Section 162(m) changes.

Despite some uncertainty as to the final wording and the transition rule, enactment of the changes to Section 162(m) appears sufficiently likely that companies should prepare for the elimination of the performance-based exception. Following are actions items to consider and planning opportunities available if the legislation passes:

  1. Companies should determine the extent to which their currently outstanding performance-based awards will satisfy the transition rule.
  2. Companies should consider accelerating into 2017 payments that would be made to their CFOs or to individuals who would have been NEOs for 2017, except that they terminated employment in 2017, e.g., a former CEO, to the extent that such payments would not satisfy the transition rule and are permissible under Section 409A.
  3. Companies and compensation committees should consider how they can reduce the impact of the lost deduction for performance-based compensation for future cash and equity awards. One action available to many companies is to award qualifying incentive stock option under Code Section 422 (ISOs). Some companies are even considering mandatory compensation deferral (or encouraging executives to defer compensation). Either of these actions would be subject to a series of legal requirements, but could be beneficial to the company.
  4. Compensation committees should begin to plan for the reporting of non-deductible compensation in their 2019 proxy statements. We believe that most companies will address this issue on a preliminary basis in their upcoming 2018 proxies.