I know that some of you are still preparing for your annual shareholders meeting. After the annual meeting, the Compensation Committees and the appropriate members of the Company’s legal, executive compensation, tax, and/or HR functions should prepare to quickly 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 questions regarding, and pressure to (at least) consider, a possible change in compensation strategy.
In order to give the Compensation Committee time to act and react before year end, we suggest that you be prepared to (i) quantify the impact of the change and (ii) place proposals and alternatives before the Committee at its next meeting (which you may need to get on the agenda soon). Of course, we don’t know precisely what the critical transition rule guidance from the IRS will look like yet (in June, we hope?), but you should prepare in advance to put this information before the Compensation Committee.
In addition to quantifying the impact of the lost deduction, it is critical that we take all actions necessary to preserve the grandfathered status of your plans and agreements in place on November 2, 2017. The first step is to review and inventory all written compensation plans and agreements that conceivably could qualify for continued deductibility under the grandfathering provisions of the 162(m) transition rule. This includes all plans and agreements of any kind providing compensation to any officers—severance, change in control, and employment agreements, non-qualified plans, everything.
Next, you will need to consult with internal or outside counsel to determine which of the plans and agreements may qualify for grandfathered status under the “legally binding right” test of the transition rules. You may need legal advice on this matter.
Finally, we should jointly consider compensation designs and strategies that may help ameliorate the loss of the deduction for compensation over $1 million.
