Around this time of year, many companies find themselves close to exhausting the authorized share pool approved by stockholders in their Stock Incentive Plans. One of the best strategies for extending the duration of the pool is to utilize the “inducement award” exception to the NYSE and NASDAQ shareholder approval requirements. In the past, one drawback of an inducement award had been that it would not qualify for the stock option/SAR or qualified performance-based compensation exemption from the $1 million deductibility limit of Code Section 162(m). However, with that exception gone, that drawback no longer exists!

To qualify as an inducement award, other requirements must be met:

  • The inducement grant exception is only available for someone joining the company as a new employee, or someone who was previously an employee or director but is rejoining the company following a bona fide period of non-employment. The exception is not available to induce an individual to join the company as a non-employee director, consultant, advisor, or independent contractor.
  • The award must be a material inducement to the individual accepting the job. That is, the company must communicate the award terms prior to job acceptance as part of the hiring process.
  • The independent directors must approval the award.

There are other complications attached to an inducement award, mostly additional compliance steps, but the absence of this one seems to make such awards a bit more practical.