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  • Executive Compensation
  • October19th

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    Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) imposes a $1 million deduction limit on compensation paid to a publicly held company’s chief executive officer and next four highest compensated officers (“Covered Employees”). However, amounts that qualify as “performance-based compensation” as defined in Code Section 162(m) are excepted from this $1 million deduction limitation. To qualify as performance-based compensation, Code Section 162(m) requires that the compensation be payable “solely on account of the attainment of one or more performance goals.”

    Regulations issued under Code Section 162(m) provide that performance-based compensation is not payable solely on account of the attainment of one or more performance goals if the Covered Employee could receive all or part of the compensation without attaining the performance goals. The regulations, however, provide an exception: compensation does not fail to be qualified performance-based compensation if the plan or award permits the compensation to be paid upon the Covered Employee’s death or disability, or upon a change of ownership or control of the company (although the compensation actually paid on account of those events prior to the attainment of the performance goal would not be qualified performance-based compensation).

    New Rulings
    Based on certain private letter rulings published by the Internal Revenue Service (“IRS”) before 2008, publicly held companies typically paid performance-based compensation to a Covered Employee upon a termination of the Covered Employee’s employment by the company without cause, upon the employee’s termination of employment for good reason, or upon the Covered Employee’s retirement. However, in 2008, the IRS released Private Letter Ruling 200804004, which was followed by Revenue Ruling 2008-13 (together, the “Rulings”) which reversed the IRS’ earlier position regarding the payment of performance-based compensation upon a Covered Employee’s termination of employment by the company without cause, termination of employment for good reason, or retirement.

    In the Rulings, the IRS stated that if a plan or agreement provides that compensation will be paid (regardless of whether the performance goal is attained) in the event of the employee’s termination of employment by the company without cause, termination of employment for good reason or retirement, such compensation will not be payable solely on account of attainment of the performance goals, and therefore, will not be performance-based compensation under Code Section 162(m). Therefore, according to the Rulings, the performance awards in question would be subject to the $1 million deduction limit under Code Section 162(m), even if employment was never actually terminated and the award was actually paid upon attainment of the pre-stated performance goal while the Covered Employee remained in the employ of the company (i.e., the inclusion of these provisions in the plan or agreement are sufficient to disqualify the awards even if such provisions are never utilized).

    Effective Dates
    The Rulings apply to any new, renewed or extended employment agreement that became or becomes effective after February 1, 2008. In addition, the Rulings apply prospectively to any amounts that are paid under a plan, agreement, or contract if the performance period for such compensation begins after January 1, 2009. Therefore, for most companies, the 2009 performance period is ending and these companies should ensure that their employment agreements, as well as their nonqualified deferred compensation plans, and equity plans and awards are all compliant with the Rulings.

    Please contact the Law Offices of Scott D. Segal, P.A. for more information.

  • August18th

    No Comments

    In July, the President sent draft legislation to Congress that would seek to ensure the independency of compensation committees. The Administration opined that some compensation committees may not be fully independent of management — for example, because the directors themselves stand to gain from the decisions of executives. And even where the members of the committee are independent of management, they may lack the tools to bargain effectively with executives over complex compensation decisions or may receive advice from consultants or legal counsel that face conflicts of interest.

    The proposed legislation takes three important steps to ensure that compensation committees have the independence and expert assistance they need to serve their important role:

    • First, the legislation requires that members of the compensation committee meet exacting new standards for independence. To be considered independent, members of the compensation committee may not accept any fees from the company for any activity other than their involvement in the board of directors, compensation committee, or other board committee.

    • Second, to ensure that committees are receiving objective advice, the legislation requires that any compensation consultants and legal counsel they hire be independent from management.

    • Finally, the legislation requires that compensation committees be given the authority and funding to hire independent compensation consultants, outside counsel, and other advisers who can help ensure that the committee bargains for pay packages in the best interests of shareholders. At the same time, it requires that if the committee decides not to use its own compensation consultant, it explain that decision to shareholders.