القسم 162 (م) خيارات الأسهم

القسم 162 (م) المزالق.

إنه موسم وكيل. وبالنسبة للشركات العامة التي تعتمد على استثناء التعويض القائم على الأداء إلى حد الاستقطاع السنوي البالغ مليون دولار بموجب المادة 162 (م) من قانون الإيرادات الداخلية (كود)، فإن ذلك يعني أن الوقت قد حان لاعتماد خطط حوافز سنوية وطويلة الأجل، وتحقيق أهداف األداء من خطط السنة السابقة، واإلفصاح عن أهداف األداء، ومعالجة استقطاع التعويضات التنفيذية في اإلفصاحات السنوية الخاصة بمناقشة التعويض والتحليل.

وقد سلطنا الضوء أدناه على العديد من المزالق الشائعة في الامتثال التي يمكن أن تكون قاتلة للتأهل للاستثناء من الجزء 162 (م) من الاستثناءات القائمة على الأداء. يجب على الشركات العامة مراجعة ترتيبات التعويضات القائمة على الأداء في ضوء هذه المزالق لتعظيم خصمها الضريبي للتعويض المدفوع إلى كبار المسؤولين التنفيذيين.

القسم المشترك 162 (م) المزالق.

السماح بدفع تعويض على أساس الأداء عند التقاعد أو إنهاء الخدمة أو إنهاء الخدمة لأسباب وجيهة. وفقا لحكم الإيرادات لعام 2008-2013، فإن التعويضات المستحقة الدفع عن فترات الأداء التي تبدأ بعد 1 يناير 2009 أو المدفوعة بموجب اتفاقيات التوظيف المبرمة بعد 21 فبراير 2008 (أو التي يتم تجديدها أو تمديدها بعد ذلك التاريخ، بما في ذلك التجديد التلقائي أو التمديدات) سوف غير مؤهلة على أساس الأداء إذا كان يمكن دفعها دون النظر إلى ما إذا كانت أهداف الأداء يتم استيفاؤها عند تقاعد السلطة التنفيذية، يتم إنهاؤها قسرا دون سبب، أو إنهاء العمل لسبب وجيه. وتنطبق هذه القاعدة بغض النظر عما إذا كان أي من هذه الأحداث يحدث بالفعل أو أن أهداف الأداء قد تحققت بالفعل؛ فإن مجرد وجود هذا الحكم يلغي الترتيب. [1] ولذلك، ينبغي للشركات مراجعة عقود العمل، واتفاقات إنهاء الخدمة، وترتيبات التعويض الأخرى لمعرفة ما إذا كانت الترتيبات القائمة على الأداء التي يقصد بها الامتثال للبند 162 (م) يمكن دفعها عند التقاعد أو الإنهاء غير الطوعي أو الإنهاء لأسباب وجيهة.

السماح لأعضاء مجلس الإدارة الذين ليسوا "مدراء خارجيين" بالعمل في اللجنة التي تأذن بإدارة القسم 162 (م) بالتعويض القائم على الأداء. وللتأهل للتعويض القائم على الأداء، يجب منح التعويض وإدارته من قبل لجنة تتألف فقط من اثنين أو أكثر من "المديرين الخارجيين". ويعرف "المديرون الخارجيون" بأنهم مديرون ليسوا موظفين سابقين أو موظفين حاليين أو سابقين (بمن فيهم المديرون الذين عملوا كمسؤولين مؤقتين تبعا للظروف) ([2])، والذين لا يتلقون عموما مكافآت غير تعويض المدير عن المؤسسة. إن تلبية متطلبات بورصة نيويورك أو بورصة ناسداك للمديرين المستقلين أو متطلبات لجنة الأوراق المالية والبورصات للمديرين غير العاملين بموجب القاعدة 16b-3 (في حين أنها إلزامية بشكل عام) ليست كافية - متطلبات القسم 162 (م) مختلفة (ويمكن أن تكون أكثر تقييدا).

استخدام هدف الأداء الذي لا يستند إلى معايير الأعمال المعتمدة من قبل المساهمين. إن التعويضات غير خيارات األسهم وحقوق تقييم األسهم الممنوحة بسعر ممارسة يعادل على األقل قيمة السوق العادلة العادلة للمنح، سوف تكون مؤهلة كتعويض قائم على األداء فقط إذا تم دفعها فقط عند تحقيق واحد أو أكثر من األسهم المحددة مسبقا، أهداف الأداء الموضوعية، استنادا إلى معايير الأعمال التي وافق عليها المساهمين. لا يجوز للجنة التعويضات أن تحيد عن معايير العمل المدرجة في الخطة المعتمدة من قبل المساهمين. ولا يلزم أن تكون هذه المعايير محددة فيما يتعلق بالأهداف المحددة المستخدمة. على سبيل المثال، لا يلزم أن تكون الخطة محددة بحيث تنص على أن هدف الأداء هو زيادة بنسبة 10٪ في ربحية السهم الواحد. وبدلا من ذلك، فإن الخطة تحتاج فقط إلى أن يكون هدف الأداء قد يستند إلى ربحية السهم الواحد. ومع ذلك، يجب على الشركة، وفقا لمتطلبات الكشف عن التعويضات الخاصة بالبورصة السعودية، أن تكشف وتحلل سنويا معايير وأهداف أداء محددة في مناقشات التعويض وتحليلها ما لم يتضمن الكشف أسرار تجارية سرية أو معلومات تجارية أو سرية سرية، في ضرر تنافسي للشركة.

عدم الحصول على موافقة المساهمين على معايير العمل التي تستند إليها أهداف الأداء. ويجب عدم الموافقة على الأهداف المحددة التي يجب الوفاء بها في إطار هدف الأداء من قبل المساهمين. ومع ذلك، إذا كان للجنة التعويضات سلطة تغيير الأهداف في إطار هدف الأداء من سنة إلى أخرى بعد أن وافق المساهمين على معايير العمل التي تستند إليها أهداف الأداء، يجب الإفصاح عن معايير العمل وإعادة الموافقة عليها من قبل المساهمين على الأقل كل خمس سنوات. لذلك، إذا وافق المساهمون على آخر معايير العمل في خطة في عام 2005، ينبغي تقديم معايير العمل إلى المساهمين لاعتمادها في عام 2018. وتشمل الشروط المادية لأهداف الأداء التي يجب إعادة الموافقة عليها (1) فئة الموظفين المؤهلين، 2) أنواع معايير العمل التي تستند إليها العوائد أو المنح المستندة إلى الأداء، و (3) الحد الأقصى للمبلغ النقدي أو الأسهم التي يمكن تقديمها خلال فترة محددة إلى أي موظف للحصول على مكافآت قائمة على الأداء بموجب خطة.

فشل في تحديد أهداف الأداء في الوقت المناسب أو إجراء تغييرات على أهداف الأداء أو الأهداف. يجب وضع أهداف األداء خطيا في موعد أقصاه 90 يوما بعد بداية فترة الخدمة التي تتعلق بها أهداف األداء) أو قبل 25٪ من فترة الخدمة هذه (وفي الوقت الذي تكون فيه النتيجة غير مؤكدة بشكل كبير. بالنسبة لفترات خدمة السنة التقويمية (والأداء)، يعني ذلك أنه يجب تحديد أهداف الأداء لخطة سنوية بحلول 31 مارس 2018. ولا يمكن تغيير أهداف الأداء بعد هذه الفترة الأولية.

دفع التعويض عندما لا يتم تحقيق أهداف الأداء. ولكي يتأهل التعويض على أساس الأداء، يجب دفع التعويض فقط على تحقيق هدف واحد أو أكثر من أهداف الأداء الموضوعي. وفي ظل البيئة الاقتصادية الحالية، لم تحقق العديد من الشركات أهداف أدائها، وقد تفكر في دفع مكافآتها التقديرية للمدراء التنفيذيين لجهودهم في عام 2009. كلمة تحذير: المكافأة التقديرية لن تكون مؤهلة للاستثناء القائم على الأداء، ويمكن أيضا تعريض الاستثناء القائم على الأداء للمكافآت السابقة أو المستقبلية للخطر، إذا كانت الوقائع والظروف تشير إلى أن التعويض القائم على الأداء يدفع بغض النظر عن أدائه. وعلى الجانب الآخر، يجب ألا يتجاوز التعويض المستحق عن تحقيق هدف الأداء الحد الذي وافق عليه المساهمون، ولا ينبغي أن توفر الخطة للجنة التعويضات سلطة تقديرية لدفع أكثر من المبلغ المأذون به.

ضبط مبالغ المكافأة للأحداث اللاحقة إذا لم يتم تضمين هذا التعديل في صيغة هدف الأداء. ولكي يكون التعويض مستندا إلى الأداء، يجب أن يكون التعويض مستحقا بموجب صيغة موضوعية لحساب المبلغ المستحق الدفع إذا تحقق هدف معين. ومن الممكن تعديل مقاييس الأداء لبعض الأحداث اللاحقة الموضوعية (مثل برامج إعادة التنظيم وإعادة الهيكلة أو تكاليف إنهاء الخدمة التنفيذية الأخرى، والتكامل والنفقات الأخرى غير المتكررة، وبيع أو اقتناء وحدة أعمال)؛ ومع ذلك، يجب تضمين هذه الميزة في صيغة هدف الأداء عند إنشائها في البداية، ولا يمكن إضافتها في نهاية فترة الأداء. إذا نشأت ظروف غير متوقعة، يمكن للجنة التعويضات استخدام سلطتها التقديرية لخفض العائد إلى المستوى المطلوب استنادا إلى الظروف، ولكن لا يمكن زيادة الدفع لتجاهل تأثير الأحداث اللاحقة في حالة عدم وجود آلية تسوية.

زيادة مبلغ التعويض الذي كان سيعود على خلاف ذلك عند بلوغ أهداف الأداء. لن يكون التعويض مؤهلا على أساس األداء إذا كان للجنة التعويض سلطة تقديرية لزيادة المبلغ المستحق عند تحقيق أهداف األداء. ومع ذلك، قد يكون للجنة سلطة تقديرية لخفض الدفع.

دفع الجوائز أو المكافآت دون الحصول على شهادة لجنة التعويضات التي تم الوفاء بها أهداف الأداء. ويتعين على لجان التعويضات أن تثبت أن أهداف الأداء قد استوفيت لكي يتم خصم المبالغ المدفوعة عند بلوغ تلك الأهداف في إطار الباب 162 (م). وينطبق ذلك على أي مكافآت أو مكافآت، بما في ذلك منح منح حقوق الملكية بناء على األداء. وينبغي إدراج هذه الشهادة في محضر لجنة التعويضات.

• إهمال أو حذف الشروط المطلوبة التي يجب أن يوافق عليها المساهمون للحصول على تعويض للتأهل على أساس الأداء. تتضمن الشروط المادية التي يجب أن يوافق عليها المساهمون الحد األقصى للتعويض الذي يمكن دفعه ألي موظف أو المعادلة المستخدمة لحساب مبلغ التعويض الذي يجب دفعه للموظفين األفراد إذا تم تحقيق أهداف أداء معينة، والتعويض، ووصف لمعايير الأعمال التي تستند إليها أهداف الأداء. يجب أن يكون وصف التعويض المستحق محددا بما فيه الكفاية بحيث يمكن للمساهمين تحديد الحد الأقصى للمبلغ الذي يمكن دفعه لأي موظف خلال فترة محددة. فيما يتعلق بالخيارات و سار، يجب على الخطة أن تحدد الحد الأقصى لعدد الأسهم التي يمكن أن تمنح الخيارات أو سار خلال فترة محددة إلى أي موظف.

منح خيارات الأسهم أو الأسهم التي تزيد عن حدود الخطة أو المبلغ الذي يمكن منحه للفرد في فترة زمنية محددة. يجب منح خيارات الأسهم والسهم بموجب خطة وافق عليها المساهم والتي تحتوي على الحد الأقصى لعدد الخيارات أو سار التي يمكن منحها لأي موظف في فترة محددة وسعر الممارسة.

السماح للمدراء الداخليين بالمشاركة في منح خيارات الأسهم أو الأسهم. يجب منح خيارات الأسهم والسهم من قبل "المديرين الخارجيين" وفقا لخطة وافق عليها المساهمين من أجل أن تكون مؤهلة للتعويض على أساس الأداء بموجب القسم 162 (م).

منح خيارات أسهم مخفضة أو سار. يجب أن ال يكون سعر ممارسة) أو قياس (خيارات األسهم والسهم المخصص للتأهل مع القسم 162) م () والمعفى من القسم 409 أ من التعليمات البرمجية (أقل من القيمة السوقية العادلة للمخزون األساسي في تاريخ المنح - فإن مبلغ التعويض الذي يمكن أن يحصل عليه الموظف يجب أن يستند فقط إلى زيادة في قيمة السهم بعد تاريخ المنح. تؤكد مذكرة المشورة القانونية العامة الأخيرة الصادرة عن مصلحة الضرائب الأمريكية المؤرخة في 6 يوليو 2009 أن خيارات الأسهم المخفضة أو الأسهم التي لا يمكن أن تكون مؤهلة على الإطلاق كالتعويض المستند إلى الأداء بموجب القسم 162 (م)، وتنص على أنه لا يمكن الشفاء من الخيارات المخصومة والسهم لأغراض التأهل التعويض القائم على الأداء في إطار الباب 162 (م).

ال توثق في الوقت نفسه خيار األسهم ومنح البحث والإنقاذ أو عدم توثيق المنح تماما. علی الرغم من أن اللوائح 162 (م) لا تتطلب عقد اجتماعات رسمیة للجنة لمنح الخیارات أو سار أو حتی توثیق فوري لھذه المنح، فإن المراجعة التي أجریتھا مصلحة الضرائب (إرس) قد اتخذت موقفا بأنھ یتم خصم الخیارات (وبالتالي لا تکون مؤھلة علی أساس الأداء التعويضات بموجب القسم 162 (م)) عندما توثق المنح بعد أسابيع من تاريخ المنح باستخدام "اعتبارا من" تواريخ المنح أو الموافقات المكتوبة بالإجماع، عندما لا تكون هناك وثائق معاصرة لاجتماعات لجنة التعويضات أو عندما تكون هناك أذونات شفوية فقط من مجلس الإدارة أو لجنة التعويضات. في حال قررت مصلحة الضرائب أنه من غير الممكن تحديد تاريخ المنح، فإن مصلحة الضرائب ستستخدم تاريخ قياس المحاسبة المالية كبديل عن تاريخ المنح. ولتجنب هذا التحدي، يجب على لجنة التعويضات أن تكون دقيقة عن متى يتم منح خيار أو ريال سعودي واستكمال جميع وثائق الشركة في الوقت المناسب، على سبيل المثال، عن طريق إعداد وتوقيع وتاريخ محاضر اللجنة أو اجتماعات ووك في اجتماع اللجنة، أو في غضون يوم أو يومين بعد الاجتماع أو بعد اتخاذ القرار بمنح خيارات أو سار. وهذا يثير أيضا سؤالا عن "أفضل الممارسات" لمنح تعويضات رأس المال.

منح خيارات الأسهم أو الأسهم أو دفع تعويضات أخرى بموجب خطة لم تتم الموافقة عليها من قبل المساهمين.

تعديل الخطة بشكل جوهري بدون موافقة المساهمين.

بالنسبة للشركات التي لديها اكتتاب عام، فشلت في الحصول على موافقة المساهمين على خطة ما قبل الاكتتاب قبل اجتماع المساهمين الأول بعد نهاية السنة التقويمية الثالثة بعد الاكتتاب العام.

تسريع تاريخ دفع التعويض القائم على الأداء دون تخفيض مبلغ الدفع لتعكس القيمة الزمنية للنقود.

يمكن للشركات التخفيف من التأثير السلبي لعدم الامتثال للجزء 162 (م) من خلال طلب إرجاء أي مبالغ لا يمكن خصمها من قبل الشركة إلى تاريخ بعد انتهاء خدمة الموظف. ويمكن إجبار المديرين التنفيذيين على تحمل مخاطر الائتمان في الأوقات الاقتصادية الصعبة مع المقاومة. كما نضع في اعتبارنا أن أي تأجيل من هذا القبيل يجب أن يتم وفقا للقسم 409A.

وينبغي أن تنظر الشركات في وضع سياسات استرجاع الأموال فيما يتعلق بالتعويض القائم على الأداء. وتسمح سياسة الاسترداد للشركة باسترداد التعويض إذا أشارت المراجعة اللاحقة إلى أن المدفوعات لم تحسب بدقة أو لم تتحقق أهداف الأداء.

إذا كان لديك أي أسئلة أو ترغب في مزيد من المعلومات حول أي من القضايا التي تمت مناقشتها في هذا تنبيه المواضيع الساخنة، يرجى الاتصال بأي من المحامين مورغان لويس التالية:

(1) يمكن أن يكون التعويض مؤهلا على أساس الأداء حتى إذا كانت الخطة تسمح بدفع التعويضات عند الوفاة أو العجز أو تغيير الملكية أو السيطرة دون بلوغ أهداف الأداء. وتحذر اللوائح أيضا من أن التعويض المدفوع فعلا بسبب تلك الأحداث لن يكون مؤهلا على أساس الأداء. ومع ذلك، فإن الاستثناءات المنفصلة تضمن عموما خصم هذه المدفوعات، نظرا لأن المستفيدين (بعد وفاة أو عجز المدير التنفيذي) أو القائم بالدفع (في حالة حدوث تغيير في السيطرة) يحتمل أن يكون معفيا من المادة 162 (م) على أي حال .

[2] ما إذا كان المدير الذي يعمل كموظف مؤقت مؤهلا "كمدير خارجي" يعتمد على الحقائق والظروف. في حكم الإيرادات 2008-32، خلصت مصلحة الضرائب إلى أن المدير لم يكن مؤهلا "كمدير خارجي" استنادا إلى الحقائق التالية: (1) أن الشركة عملت المدير لفترة غير محددة من الوقت للعمل كرئيس تنفيذي مؤقت مع كامل السلطة المستثمرة في ذلك المكتب؛ (2) كان المدير في خدمة منتظمة ومستمرة لمدة عام تقريبا؛ (3) لم يكن المدير يعمل في معاملة خاصة أو فردية؛ و (4) لم يكن المدير مجرد لقب "ضابط". ومع ذلك، في ظل السوابق القضائية القسم السابق 162 (م)، غائبة واحدة أو أكثر من هذه الشروط المذكورة، "ضابط مؤقت" قد لا تفي بالضرورة تعريف "ضابط"، وبالتالي قد لا يزال مؤهلا "مدير خارجي".

موارد ذات الصلة.

المناطق.

حقوق الطبع والنشر & # 169؛ 2017 مورغان، لويس & أمب؛ بوكيوس لب. كل الحقوق محفوظة.

الضرائب والتعويضات التنفيذية.

ورقة إحاطة # 344.

وكان موضوع التعويض التنفيذي منذ فترة طويلة موضع اهتمام الأكاديميين، والصحافة الشعبية، والسياسيين. ومع استمرار الزيادة في التعويضات التنفيذية والزيادة الناجمة عن التفاوت في الأجور بين هؤلاء المسؤولين التنفيذيين ومتوسط ​​العمال، فإن هذه المسألة تأتي مرة أخرى في مقدمة النقاش بشأن السياسة العامة. وعلى مر السنين، قام المشرعون بتبديل قانون الضرائب للحد من أشكال التعويضات المتعسفة من التعويضات التنفيذية، في حين زادت الهيئات الرقابية من كمية شركات الإفصاح التي يجب أن تقوم بها. وفي الكونغرس الحالي، أدخلت السيدة باربرا لي (D-كاليف) قانون حقوق الدخل لعام 2018 (ص. 382) الذي سيعدل قانون الإيرادات الداخلية لحظر الاستقطاعات للتعويض المفرط عن أي موظف بدوام كامل؛ ويعرف التعويض بأنه "مفرط" إذا تجاوز مبلغ 000 500 دولار أو 25 ضعف تعويض الموظف الأدنى أجرا، أيهما أكبر.

والهدف من هذه الدراسة هو دراسة أثر تقييد مسبق على استقطاع التعويضات، وقانون الإيرادات الداخلية، القسم 162 (م). وعلى النقيض من الكثير من النقاش اليوم حول ضرورة قيام الحكومة الفيدرالية برفع الإيرادات الضريبية، فإن الهدف الأساسي من القسم 162 (م)، الذي اقتصر على التخفيضات الضريبية للتعويضات التنفيذية، لم يكن زيادة الإيرادات بل للحد من الإفراط في النفقات، وبعبارة أخرى، أن تفعل شيئا بشأن التعويض المفرط الذي شنه المرشح الرئاسي عام 1992 وليام جيفرسون كلينتون ضده. وستستعرض هذه الورقة فعالية ذلك الحكم في تحقيق أهدافه، وتقدم معلومات عن مقدار الإيرادات التي أثيرت أو فقدت بسبب الخصومات المتعلقة بالتعويض التنفيذي. وفيما يتعلق بالحد من التعويض المفرط وغير القائم على الأداء، يرى الكثيرون أن القسم 162 (م) فشل، بما في ذلك كريستوفر كوكس، رئيس لجنة الأوراق المالية والبورصة آنذاك، الذي ذهب إلى حد أنه يشير إلى أنه ينتمي إلى " متحف العواقب غير المقصودة ". وكان السيناتور تشارلز جراسلي (R-إيوا)، الذي كان آنذاك رئيسا للجنة المالية في مجلس الشيوخ، أكثر مباشرة، قائلا:

162 (m) مكسورة. ... كان حسن النية. ولكن حقا لهن & # 8217؛ ر عملت على الإطلاق. وقد وجدت الشركات من السهل الحصول على جميع أنحاء القانون. لديها أكثر من الثقوب الجبن السويسرية. ويبدو أنه قد شجع صناعة الخيارات. يعمل هؤلاء الأشخاص المتطورين مع الأجهزة التي تشبه الساعات السويسرية للعب هذه القاعدة الشبيهة بالجبن السويسري.

وبما أن المادة 162 (م) قد مرت قبل ما يقرب من 20 عاما، فقد أظهرت البحوث الأكاديمية والممارسين زيادة كبيرة في التعويض التنفيذي، مع وجود أدلة قليلة على ارتباطها بشكل وثيق بالأداء أكثر من ذي قبل. في هذا البحث، نقدر أن التخفيضات المؤسسية للتعويضات التنفيذية كانت محدودة بموجب هذا الحكم، حيث تدفع الشركات العامة في المتوسط ​​مبلغا إضافيا قدره 2.5 مليار دولار سنويا للضرائب الاتحادية. ومع ذلك، فإنهم يستمرون في خصم معظم تعويضاتهم التنفيذية، حيث أن هذه الخصومات تكلف وزارة الخزانة الأمريكية ما يقدر ب 7.5 مليار دولار سنويا. ولأن بيانات الإقرار الضريبي الفعلي تكون سرية بموجب القانون، فإن تقديراتنا غير دقيقة إلى حد ما، حيث يتعين علينا استنتاج كل من الخصم الضريبي للتعويض التنفيذي والوضع الضريبي للشركة من الإيداعات العامة.

نتائجنا الرئيسية هي:

يسمح للشركات بخصم كامل مكونات التعويضات التنفيذية التي تلبي متطلبات مصلحة الضرائب لتتأهل على أنها تستند إلى الأداء. & # 8221؛ أحد هذه المتطلبات هو موافقة المساهمين. ومع ذلك، يتم تقديم معلومات عامة جدا للمساهمين. لذلك، يطلب من المساهمين، وعادة ما يفعلون، الموافقة على خطط دون معرفة ما إذا كانت ظروف الأداء صعبة أم لا، والعوائد المحتملة من الخطة. دفع الأداء، مثل خيارات الأسهم وخطط الحوافز غير الأسهم، التي تلبي متطلبات مصلحة الضرائب ل & # 8220؛ القائم على الأداء & # 8221؛ استثناء هو خصم كامل. الرواتب والمكافآت ومنح الأسهم قابلة للخصم ولكنها تخضع لحد أقصى قدره مليون دولار. وفي عام 2018، كان تقديرنا هو أن هناك 27.8 مليار دولار من التعويض التنفيذي الذي كان قابل للخصم. وتم خصم ما مجموعه 121.5 بليون دولار من التعويض التنفيذي خلال الفترة 2007-2018. وكان ما يقرب من 55 في المائة من هذا المجموع هو التعويض القائم على الأداء. ويبدو أن الشركات المتطورة الضرائب لا تهتم بالقيود المفروضة على الاقتطاعات وتستمر في دفع رواتب تنفيذية لا يمكن قبولها. وقد زاد عدد المدراء التنفيذيين الذين يتلقون راتبا يتجاوز الحد الأقصى للخصم البالغ مليون دولار من 563 في عام 2007 إلى 594 في عام 2018. ويهدف كل ذلك القسم 162 (م) إلى الحد من التعويض التنفيذي المفرط، قد تكبدت خسائر مالية. ولا تحظر المدونة على الشركات دفع أي نوع من التعويضات؛ وبدلا من ذلك، يحظر عليهم خصم ذلك المبلغ على إقراراتهم الضريبية. والنتيجة هي انخفاض أرباح الشركة وانخفاض العائدات إلى المساهمين. وعلى افتراض أن نسبة الضريبة الهامشية البالغة 25 في المائة على أرباح الشركات (تقدير متحفظ)، فإن الإيرادات التي فقدت للحكومة الاتحادية في 2018 من التعويض التنفيذي القابل للخصم بلغت 7 مليارات دولار، وكانت الإيرادات الفيدرالية الضائعة خلال الفترة 2007-2018 تبلغ 30.4 مليار دولار. أكثر من نصف الإيرادات الفيدرالية الضائعة يرجع إلى إعانات دافعي الضرائب لأداء التنفيذيين & # 8220؛ دفع الأداء. & # 8221؛ ومن المرجح أن تتعافی التعویضات التنفیذیة في المستقبل القریب، متجاوزا مستویاتھا في عام 2007.

1. الخلفية.

ويغطي القسم 162 من قانون الإيرادات الداخلية نفقات التجارة والأعمال. وكما هو منصوص عليه في القسم 162) أ (، يسمح للكيانات بخصم جميع المصاريف العادية والضرورية المدفوعة أو المتكبدة خالل السنة الخاضعة للضريبة في القيام بأي تجارة أو نشاط تجاري، بما في ذلك، كما هو مبين في القسم 162) أ () 1 ، بدل معقول للمرتبات أو التعويضات الأخرى عن الخدمات الشخصية المقدمة فعلا.

ومع ذلك، فإن عددا من أقسام قانون الإيرادات الداخلية - ولا سيما الأقسام 162 (م) و 162 (م) (5) و 162 (م) (6) و 280 (ز) - تحد من استحقاق التعويض التنفيذي. وقد اعتمد في عام 1993، القسم 162 (م)، الذي ينطبق على الشركات المتداولة علنا، ويحد من خصم التعويض التنفيذي إلى مليون دولار لكل فرد مغطى (1)، باستثناء التعويض المؤهل على أساس الأداء. أي أنه يمكن للشركة أن تقتطع مليون دولار من التعويض غير القائم على الأداء لكل فرد مشمول بالتغطية ومبلغ غير محدود من التعويضات القائمة على الأداء.

وعلى النقيض من المادة 162 (م)، فإن البابين 162 (م) (5) و 162 (م) (6) هما أحدث وأكثر استهدافا. فإنها تنطبق، على التوالي، على المشاركين في برنامج الإغاثة من الأصول المضطربة (تارب) وشركات التأمين الصحي. كما حددوا حد أدنى للخصومات الضريبية المسموح بها للتعويض بمبلغ 000 500 دولار للفرد، دون أي تمييز أو استثناء للتعويض القائم على الأداء. واعتمد القسم 162 (م) (5) في عام 2008 وينطبق على الرئيس التنفيذي (سيو)، والمدير المالي (كفو)، والضباط الثلاثة الأعلى أجرا من الكيانات العامة والخاصة الذين يقبلون الأموال بموجب برنامج تارب. يصبح القسم 162 (م) (6) ساري المفعول في عام 2018، وتنطبق قيوده على معظم العاملين في مقدمي الرعاية الصحية. لا ينطبق القسم 280 (ز) على الدفعات الدورية للموظفين، بل على تغيير مدفوعات الرقابة 2. إذا كان المبلغ مساويا أو أكبر من ثلاثة أضعاف التعويض المغطى لكل فرد من الفئة W-2 مقابل الخمس سنوات السابقة سنوات، تخسر الشركة الخصم الضريبي لتلك الدفعة، ويخضع الفرد لضريبة إنتاج بنسبة 20٪ على الدفع الزائد. وكما هو الحال في البندين 162 (م) (5) و 162 (م) (6)، لا يتضمن القسم 280 (ز) استثناء يستند إلى الأداء.

ومن أجل مناقشة خصم الضرائب من التعويض التنفيذي، ستركز هذه الورقة على القسم 162 (م) بسبب اتساع نطاقها. تذكر، أنه لا يقتصر على قطاع معين من الاقتصاد؛ فإنه يحد من خصم التعويض التنفيذي في المؤسسات العامة إلى مليون دولار لكل فرد مشمول بالتغطية، مع استثناء للتعويض المؤهل على أساس الأداء. للتأهل كتعويض قائم على الأداء، يجب تلبية المتطلبات التالية:

ويجب دفع التعويض فقط على أساس تحقيق السلطة التنفيذية لواحد أو أكثر من أهداف الأداء التي تحددها صيغة موضوعية. ويمكن أن تشمل هذه الأهداف سعر السهم أو حصته في السوق أو المبيعات أو التكاليف أو الأرباح، ويمكن تطبيقها على الأفراد أو وحدات الأعمال أو المؤسسة ككل؛ يجب وضع أهداف الأداء من قبل لجنة التعويضات من اثنين أو أكثر من المديرين المستقلين؛ ويجب اإلفصاح عن هذه الشروط إلى المساهمين والموافقة عليها بأغلبية أصواتهم. ويجب على لجنة التعويضات أن تثبت أن أهداف الأداء قد تم الوفاء بها قبل الدفع.

وفي حين أن الغرض من القسم 162 (م) هو الحد من التعويض التنفيذي المفرط، فإن صاحب البلاغ يرى عدة نقاط ضعف أو ثغرات في المدونة. وفيما يتعلق بالموافقة على المساهمين، تحتاج الشركات فقط إلى إعطاء المساهمين أكثر المصطلحات العامة عندما يضعون خطة التعويض للتصويت. يطلب من المساهمين، وعادة ما يفعلون، الموافقة على الخطط دون معرفة ما إذا كانت ظروف الأداء صعبة أم لا، والعوائد المحتملة من الخطة. وتترك هذه التفاصيل للجنة التعويضات التي يجب أن تحدد الشروط في موعد أقصاه الربع الأول من السنة المالية للشركة. والمشكلة أيضا هي أنه إذا لم يتم الوفاء بهذه الشروط، لا يحظر على الشركة دفع التعويض. وبدلا من ذلك، يحظر خصم هذا المبلغ من الإقرار الضريبي. والنتيجة هي انخفاض أرباح الشركة. الأشخاص الذين يعانون هم المساهمين - نفس الأشخاص الذين، حتى في هذا اليوم من الكشف عن تعويضات موسعة، لا يتم تزويدهم بتفاصيل عن خطط التعويض التنفيذي قبل أن يطلب منهم التصويت عليها، كما أنها لا تقدم معلومات عن التخفيضات الضريبية المتخذة أو مصادرة.

في القسم 2، سوف نذهب من خلال مكونات حزمة التعويض ومناقشة الآثار الضريبية لكل منها. سيستخدم القسم 3 معلومات التعويض التنفيذي المفصح عنها في بيانات الشركات بالوكالة - تلك البيانات المطلوبة، والتي تفيد في تقييم كيفية دفع الإدارة وتحديد تضارب المصالح المحتمل، ويجب تقديمه إلى لجنة الأوراق المالية والبورصات الأمريكية (نموذج ديف 14A) - لتلخيص وجدول التعويضات المبلغ عنها عن كل سنة من عام 2007 إلى عام 2018، وعلى النقيض من المبالغ المبلغ عنها مع تلك التي يمكن استقطاعها بالفعل من قبل تلك الشركات. وسيقيم القسم 4 خسارة الإيرادات المرتبطة بتلك الاستقطاعات. وستختتم الورقة بالقسم 5 الذي سينظر في تأثير هذه المخصصات الضريبية، وتحديدا القيود المفروضة على الاستقطاعات وتأثيرها على التعويض التنفيذي، ونتطلع إلى كيف يمكن لبعض الأحداث الجارية، مثل اعتماد " سياسات الأجور، سوف تؤثر على مستقبل التعويض التنفيذي.

2 - عناصر حزمة التعويضات التنفيذية.

قبل أن نتمكن من استكشاف عواقب القسم 162 (م) بشكل كامل، يجب أن نفهم حزمة التعويضات التنفيذية. ومن ثم، سيعرض هذا القسم مكونات حزمة التعويضات، والتي تم تلخيصها في الرسم البياني بعنوان & # 8220؛ مكونات حزمة التعويضات، & # 8221؛ ومناقشة نتائجها الضريبية على السلطة التنفيذية والشركة.

مكونات حزمة التعويضات.

انسخ الشفرة أدناه لتضمين هذا المخطط على موقعك على الويب.

الراتب هو مبلغ التعويض الثابت، الذي يمكن التعاقد عليه، والذي لا يختلف صراحة مع الأداء. وبحكم التعريف، فإن المرتب لا يستند إلى الأداء، وبالتالي فهو غير مؤهل للاستثناء القائم على الأداء بموجب المادة 162 (م). وبالتالي فإنھ یخضع للضریبة بالنسبة للسلطة التنفیذیة والخصم للشرکة (مع مراعاة قیود الاستقطاع) في السنة المدفوعة. وتجدر الإشارة إلى أن الحد من الاستقطاعات البالغ مليون دولار ينطبق على جميع تعويضات عدم الأداء بشكل إجمالي، وليس كل عنصر من عناصر ذلك التعويض. وإذا دفعت إحدى الشركات رواتب تنفيذية قدرها 000 750 دولار، فسيتم خصم كامل المبلغ. بيد أنه إذا دفع مبلغا إضافيا قدره 000 500 دولار في شكل أشكال أخرى من تعويضات عدم الأداء، فإن خصمه الإجمالي للتعويض القائم على أساس الأداء لن يقتصر على مليون دولار؛ فإن مبلغ 000 250 دولار الإضافي غير قابل للخصم.

قد يكون تعويض المكافأة مشروطا بأداء فرد أو مجموعة أو شركة. ولأنه مشروط بالأداء، فإنه غالبا ما يدفع بعد نهاية السنة المالية للشركة. من وجهة نظر الموظف أنها خاضعة للضريبة ليس في السنة المكتسبة، ولكن في السنة الواردة. بالنسبة لصاحب العمل، تسمح لائحة الخزانة 1.404 (ب) -1T للشركة التي تستخدم طريقة المحاسبة على أساس الاستحقاق أن تستخدم الخصم في السنة المكتسبة إذا تلقى الموظف تعويضا في غضون 2.5 أشهر بعد انتهاء السنة الضابطة لصاحب العمل . وبعبارة أخرى، فإن المكافآت تخضع للضريبة للسلطة التنفيذية في السنة المستلمة، في حين يتم خصمها) خاضعة لقيود خصم (في السنة المكتسبة) على افتراض أن المكافآت يتم دفعها خالل 2.5 شهر من نهاية السنة (. على الرغم من أن المكافآت نظريا مكافأة على الأداء، فهي لا تمنح أو تدفع وفقا لخطة مكتوبة وافق عليها المساهمون، 3 وبالتالي لا تؤهل على أساس الأداء بموجب القسم 162 (م).

تعويض خطة الحوافز غير الأسهم.

على غرار المكافآت، قد يكون التعويض عن خطة الحوافز غير الأسهم مرهونا بأداء الأفراد أو المجموعات أو الشركات. الفرق بين الاثنين هو أن خطة حوافز غير الأسهم تدفع بموجب خطة مكتوبة، والتي لأغراض هذه الدراسة، سوف نفترض تلبية متطلبات القسم 162 (م) .4 وبالتالي، والمدفوعات تحت حقوق الملكية غير وخطة الحوافز خاضعة للضريبة بالكامل للسلطة التنفيذية في السنة التي تم استلامها وخصمها من قبل الشركة في السنة المكتسبة.

منح الأسهم.

وتحدث منح الأسهم عندما تعطي الشركات أسهم لموظفيها (6). وهي تختلف عن خيارات الأسهم في حالة عدم وجود سعر ممارسة لها. في حين أن خيار الأسهم فقط له قيمة إذا كان سعر سهم الشركة أعلى من سعر الممارسة، فإن منحة الأسهم لها قيمة طالما أن سعر السهم أعلى من الصفر. وبالتالي، فإن منحة الأسهم تستحق دائما أكثر من منحة خيار الأسهم لنفس العدد من الأسهم. ويمكن أن تكون منح الأسهم غير مقيدة أو مقيدة؛ ومع ذلك، فإن الغالبية العظمى من منح الموظفين مقيدة. على سبيل املثال، قد يكون القيد هو عدم قدرة السلطة التنفيذية على بيع األسهم حتى يعمل في الشركة لفترة من الوقت) فترة االستحقاق النموذجية هي ثالث أو أربع سنوات (. ويمكن أن تستند القيود أيضا إلى الأداء. على سبيل المثال، ستخسر السلطة التنفيذية األسهم إذا لم تحقق العائدات و / أو عائدات األسهم هدفا محددا مسبقا 7. وبمجرد انتهاء هذه القيود، يكون للسلطة التنفيذية ملكية كاملة لالأسهم، وبغيب عن المادة 83) ب (االنتخاب، 8 على الفور الاعتراف الدخل الخاضع للضريبة يعادل القيمة العادلة للسهم في ذلك الوقت. ولذلك، فإن سنة المنح وسنة الاعتراف الضريبي تختلف عادة. وتعتمد استقطاعات منح الأسهم على أساس الأداء على تلك القيود. أي إذا كانت القيود تستند إلى الأداء، فإن منح الأسهم قد تكون مؤهلة للاستثناء القائم على الأداء بموجب القسم 162 (م)، 9 في حين إذا كانت القيود تنتهي فقط بمرور الوقت، فإنها لا تنطبق عليها. وفي السنوات الأخيرة، كان هناك اتجاه نحو زيادة استخدام ما يسمى الآن ب "حصص الأداء"؛ غير أنها كانت في السنوات السابقة أقلية متميزة من منح الأسهم. وبناء على ذلك، فإن الافتراض الوارد في هذه الورقة هو أن معظم المنح المقدمة في السنوات السابقة والاستفادة من فترة المراقبة غير مؤهلة للاستثناء القائم على الأداء في القسم 162 (م). وتتمثل الاحتمالية في أنه كلما ازدادت المنح المقدمة على أساس الأداء، ستزداد النسبة المئوية ومبلغ الدولار من التعويض التنفيذي الذي سيتم خصمه. ومع ذلك، فإن منح الأسهم القائمة على الأداء لا تحتاج إلى الوفاء بمتطلبات الاستقطاع. فكر في المقطع التالي من بيان وكيل إنتل كوربوراتيون لعام 2018:

Section 162(m) of the tax code places a limit of $1 million on the amount of compensation that Intel may deduct in any one year with respect to its CEO and each of the next three most highly compensated executive officers (excluding the CFO). Certain performance-based compensation approved by stockholders is not subject to this deduction limit. Intel structured its 2006 Equity Incentive Plan with the intention that stock options awarded under the plan would qualify for tax deductibility. In addition, in order to maintain flexibility and promote simplicity in the administration of these arrangements, other compensation, such as OSUs, RSUs, and annual and semiannual incentive cash payments, are not designed to qualify for tax deductibility above the tax code Section 162(m) $1 million limitation.

The OSUs referred to in the above passage are outperformance stock units, i. e., performance-based, and yet are not designed to qualify under Section 162(m).

Stock options.

Stock options allow their holder to purchase one or more shares of stock at a fixed exercise price over a fixed period of time. They have value if the corporation’s share price at the time of exercise or purchase is greater than the exercise price. Since the exercise price is normally set at the share price on the date of grant, the ultimate value of the option depends upon the performance of a corporation’s share price subsequent to the date of grant. That is, they can be extremely valuable when the share price rises dramatically, but can also expire worthless if the share price declines. Like stock grants, stock options are normally granted to executives with restrictions. These restrictions generally expire with the passage of time. While companies can add performance conditions to their stock options, currently that is rather infrequent. As with stock grants, the year of grant and year of tax recognition is normally different for stock options. They differ, however, in that stock grants are taxable upon expiration of the restrictions or vesting, whereas stock options are not taxable until the holder elects to exercise the options.10 The amount that is taxable is not the fair value of the shares acquired, but the bargain element or discount, i. e., the difference between the fair value of the shares acquired less the exercise or purchase price paid. Stock options are considered performance-based under Section 162(m) if they meet minimal conditions (e. g., shareholder approval, options granted with an exercise price at or above market price on date of grant), the reasoning being that the option holder can only profit from the option if the share price increases. Thus the assumption made in this study is that stock option compensation is fully deductible to the firm.

Stock appreciation rights.

While not as popular as stock options and grants, some companies grant stock appreciation rights (SARs). Stock appreciation rights are the right to receive the increase in the value of a specified number of shares of common stock over a defined period of time. Economically, they are equivalent to stock options, with one exception. With a stock option, the executive has to purchase and then sell the shares to receive his or her profit. With a stock appreciation right, the corporation simply pays the executive, in cash or common stock, the excess of the current market price of the shares over the exercise price. Thus the executive is able to realize the benefits of a stock option without having to purchase the stock. In many cases, stock appreciation rights are granted in tandem with stock options where the executive, at the time of exercise, can choose either the stock option or stock appreciation right. For proxy-statement reporting purposes, SARs are combined with stock options. Similarly, they are treated like stock options for tax—including Section 162(m)—purposes. Consequently, for this analysis SARs will be incorporated into the broader category of stock options.

Pensions and deferred compensation.

Deferred compensation is compensation that is earned in one period but deferred by the executive to be received in a future period. If it meets the requirements of Section 409(A) of the Internal Revenue Code, tax recognition may also be deferred until a future period. Pensions are a form of deferred compensation (covered by multiple separate sections of the Internal Revenue Code), whereby after retirement from the corporation, the employee receives a payment or series of payments. These payments may be defined by the pension plan (known as a defined benefit plan), or based upon the amounts accumulated in the employee’s personal retirement account (known as a defined contribution plan, one type of which is a 401(k)). If the payments are defined by the pension plan they can be based upon a number of factors including, but not limited to, number of years with the corporation, earnings while working, and level within corporation. Pensions can be structured in many ways; for example, the payments can be fixed in amount, or they can be adjusted for inflation. Due to Internal Revenue Code limitations, executives are usually covered by more than one plan. That is, they participate in a primary “tax qualified” plan along with other employees, and have at least one “supplemental” non-qualified plan. The second plan is necessitated by Internal Revenue Code limitations on payments from a qualified plan. That is, in order to qualify for favorable tax treatment, the plan must be nondiscriminatory, that is, the benefits cannot be skewed in favor of highly paid employees, and the corporation cannot consider compensation in excess of a threshold, which was $250,000 for the year 2018 (Section 401(a)(17)), in determining pension benefits, nor make payments in excess of $200,000 (Section 415(b)). Most top executives make substantially larger sums.

For tax purposes, both defined benefit and defined contribution plans are divided into qualified and non-qualified plans. With a qualified plan, the company can contribute or fund it currently, and take the corresponding tax deductions (above and beyond the Section 162(m) limitations), while the executive does not recognize taxable income until the future when he or she receives the payments. However, given the limitations discussed above, companies turn to non-qualified or supplemental executive retirement plans (SERPs) for the bulk of retirement payments to their executives. Because these plans are not qualified, they are unfunded, as funding would subject the executive to current taxation.

To sum up, the bulk of pension and deferred-compensation payments are both taxable and deductible after retirement, at which point they are no longer disclosed in the corporate proxy statement. At that time, they will be fully deductible, as the then-retired executive will no longer be subject to Section 162(m). Thus, while the next section will discuss the amounts reported as increases in pensions and deferred compensation in the proxy statement, it will not incorporate any of those amounts when estimating the immediate tax consequences of executive compensation.11.

All other compensation.

The proxy statement summary compensation table contains one other category, a catch-all category that encompasses everything not included in the prior headings: “all other compensation.” All other compensation includes items such as those infamous perquisites; e. g., private airplanes, company cars, etc. For purposes of this paper, we assume that the amounts reported as “all other compensation” in the proxy statement are currently taxable to the executive and deductible by the company, subject to Section 162(m) limitations, as they are not performance-based.

In the above summary chart, “Components of the compensation package,” we use the phrase “likely to be fully deductible” for a reason. As outsiders, drawing data from a large-scale database, we cannot determine precisely what is and what is not deductible. Note from above that performance-based compensation can qualify for full deductibility if the company meets the requirements set forth in the Internal Revenue Code. However, sometimes companies choose not to comply with those requirements. Consider the following excerpt from Goodyear Tire & Rubber Company’s most recent proxy statement:

Tax Deductibility of Pay.

Section 162(m) of the Code provides that compensation paid to a public company’s chief executive officer and its three other highest paid executive officers at the end of the year (other than its chief financial officer) in excess of $1 million is not deductible unless certain requirements have been satisfied. The Compensation Committee believes that awards under the Management Incentive Plan and the 2008 Performance Plan qualify for full deductibility under Section 162(m).

Although compensation paid under the Executive Performance Plan is performance-based, it does not qualify for the deductibility exception for performance-based compensation since that Plan has not been approved by our shareholders. Therefore, payments under the Executive Performance Plan are subject to the Section 162(m) limitation on deductibility. Because of our significant U. S. deferred tax assets from prior periods, the limitation on deductibility has no impact on our financial position. In reviewing and considering payouts or earnings under the Executive Performance Plan, the Compensation Committee considered not only the impact of the lost tax deductions, but also the significant U. S. deferred tax assets available to us from prior periods, as well as the benefits realized by us and our shareholders from the successful efforts of our senior management team. In balancing these considerations, the Compensation Committee concluded that it would be appropriate to approve payouts in respect of the 2009-2018 grants and earnings for the 2018 performance period in respect of the 2018-2018 and 2018-2018 grants.

Without reading this passage we would have assumed that compensation paid under the Executive Performance Plan, which will be reported as non-equity incentive plan compensation, would be fully deductible. A further complication is that payments under both the Management Incentive Plan, which does qualify for the performance-based exception, and the Executive Performance Plan, which does not, are reported in the proxy statement summary compensation table as one number under the non-equity incentive column. And while Goodyear is to be commended for the clarity of its disclosure, most disclosures are not that clear.

3. Executive compensation, 2007–2018.

This section provides an analysis and discussion of executive compensation paid over 2007–2018. As shown in Table 1 , the sample is the population of U. S. public corporations as included in the Standard & Poor’s Capital IQ database and ranges from 8,960 in 2007 to 7,248 in 2018.12 Under current Securities and Exchange Commission regulations, companies are required to report in their proxy statements the compensation of each and every individual who has held either the CEO or CFO title during the year, compensation of the next three highest paid individuals,13 and compensation of up to two additional individuals who would have been among the next three highest paid individuals except that they were no longer employed at the end of the year. Reporting is not required if an individual’s compensation is less than $100,000. Turning to the second column of Table 1, we see that the number of executives included in the analysis ranges from 38,824 in 2007 to 28,365 in 2018.14 While Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals, excluding the CFO, Capital IQ and consequently we, include compensation of all executives included in the proxy statement. For executives beyond the CEO and the next three highest paid individuals we assume that compensation is fully deductible.

Sample information.

Source: Author's analysis of Capital IQ microdata.

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Table 2 describes the various components of the compensation package for 2007–2018, and lists the number of individuals receiving the item in a given year.15 For example, all executives in our sample receive a salary (companies with missing salary data are excluded from the analysis), but not all receive bonuses, and even fewer receive non-equity incentives and other forms of compensation. The mean total compensation was highest in 2007, at just over $1.7 million. The ensuing decrease in average compensation is due to the sharp drop in stock prices, which diminished the value of stock grants. The mean compensation values in this table are lower than those normally observed in the press and most studies for two reasons. The first is that most studies limit themselves to CEO compensation, whereas this study expands the sample to all executives. Because other executives are normally paid less than the CEO, this drives the average down. For example, in 2007 average total compensation for CEOs was $3,468,375, while the average for non-CEOs was $1,191,828. The second reason for lower means is the broader sample of companies used in this study. Most studies limit themselves to the S&P 500 or the S&P 1500 companies as encompassed in Standard & Poor’s ExecuComp, whereas this study incorporates those companies and many smaller publicly traded companies. Because compensation tends to increase with firm size, inclusion of these smaller companies reduces our averages. For example, in 2007 the average total compensation for executives in S&P 500 companies was $4,994,819, while the average for other companies was $1,448,167.

Mean amounts for executive compensation reported in summary compensation table (dollars; number of executives are below mean amounts)

Source: Author's analysis of Capital IQ microdata.

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Table 3 aggregates the amounts reported in Table 2 to illustrate the total of executive compensation for all publicly traded companies. Aggregate total compensation decreased from over $66 billion in 2007 to $42 billion in 2018. There are two reasons for this decrease. First, the number of companies/executives incorporated in our analysis decreased in 2018 (as shown in Table 1 and reflecting the decline in the number of publicly traded companies). Second, average compensation (as shown in Table 2) decreased as well.

Aggregate amounts for executive compensation reported in summary compensation table (billions of dollars; number of executives are below aggregate amounts)

Source: Author's analysis of Capital IQ microdata.

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As discussed in Section 2, the year of taxability for equity compensation, i. e., stock grants and stock options, differs from the year of grant. Similarly, the amounts will differ from that reported in the year of grant, as the amount reported in the year of grant will be based upon an expected amount, while that included in the executives’ income/deducted from the companies’ taxable income will be based on the actual amount. The amounts reported in tables 2 and 3 are grant date values based upon amounts from the proxy statement summary compensation table. In contrast, the amounts in Table 4 are based upon the vesting date value of stock grants and exercise date profits for stock options, as reported by companies in their proxy statements. Looking at the mean amounts, we are somewhat surprised to see that the number of employees with stock grants vesting (Table 4) is significantly less than the number receiving stock grants (Table 2). A number of potential explanations for this exist, such as stock grants vesting after retirement or stock grants not vesting because restrictions were not met. Unfortunately, the data do not allow us to determine what these reasons are. Similarly, for stock grants the aggregate amount recognized for tax purposes in Table 4 is less than the amount reported in Table 3, although the taxable amounts for stock options are generally greater than that reported in the summary compensation table.

Amounts reported for vested shares and exercised options (number of executives are below dollar amounts)

Source: Author's analysis of Capital IQ microdata.

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Table 5 focuses on the impact of Section 162(m) on the deductibility of non-performance-based compensation, which is defined as salary, bonus, stock grants, and all other compensation. As noted above, although the bonus is normally performance-based, if it is not paid pursuant to a written plan that meets Internal Revenue Code requirements, it will not qualify for the performance-based exception (and if it were paid pursuant to a written plan, it should be included in the non-equity incentive column). Stock grants with performance conditions have become more common, and therefore may qualify for the Section 162(m) performance-based exception,16 but constitute a minority of those stock grants that vested during the years 2007 through 2018. Consequently we sum these four items—salary, bonus, stock grants, and all other compensation—by individual and treat the first $1 million as deductible.

Decomposition of non-performance-based compensation into deductible and nondeductible amounts (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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We shift gears in Table 6 to examine the total deductions associated with executive compensation, performance and non-performance based. On an aggregate basis the deductible components of the compensation package decline from about $39 billion in 2007 to a little less than $28 billion in 2018, with much of the decrease being associated with fewer deductions associated with stock options. In 2018 $15 billion of the deductions were based on performance pay, down from roughly $24 billion in 2007. As discussed in the next section, even at these reduced amounts in 2018 there are substantial tax savings for the companies and revenue foregone to the federal government. The Appendix Table provides more detail underlying the aggregates in Table 6 by delineating the total deductions for CEOs and other executives and doing so for large firms (S&P 500) and other firms.

Total deductible compensation (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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Compensation, taxation, and deductibility: An illustration.

At this point an illustration comparing the amounts reported in the proxy statement summary compensation table, executive’s tax return, and corporation’s tax return might be informative. Consider the 2018 compensation of Paul S. Otellini, president and CEO of Intel. According to the proxy statement summary compensation table, he received total compensation of $17,491,900 for that year.

Of that amount, stock awards ($7,331,100), option awards ($1,802,800), and change in deferred compensation ($319,000) are not taxable currently. His taxable income from Intel will include a salary ($1,100,000), a bonus ($34,000), non-equity incentive plan income ($6,429,500), all other compensation ($475,500), stock grants that vested during the year ($1,319,600), and exercised stock options ($132,100). His total taxable income was therefore $9,490,700.

The amount currently deductible by Intel includes both non-performance compensation and compensation that qualifies for the performance-based exception. Non-performance compensation includes the salary ($1,100,000), bonus ($34,000), all other compensation ($475,500), and stock grants that vested during the year ($1,319,600), for a total of $2,929,100. With the $1 million cap on deductions, Intel forfeits deductions on $1,929,100 of CEO compensation. At the same time, it can deduct for non-performance-based compensation (the maximum allowable at $1 million), non-equity incentive plan income ($6,429,500), and the exercised stock options ($132,100), for a total deduction of $7,561,600—an amount much less than Mr. Otellini’s $9,490,700 in taxable income.

Mr. Otellini and Intel provide a perfect illustration of the aggregate numbers in Table 5. What is most interesting, to this author, about Table 5 is the magnitude of deductions being forfeited by public corporations for the sake of executive compensation. Over the four-year period examined, executives recognized $96 billion in taxable income from the four categories of salary, bonus, vest value of stock grants, and all other compensation, while companies only deducted $55 billion, forfeiting slightly more than $41 billion in potential deductions!

Hence, one of the problems with Section 162(m), which was adopted ostensibly to reduce excessive, non-performance-based compensation (see U. S. House of Representatives 1993), was that it never touched on compensation directly. Instead, it legislated the deductibility of that compensation and penalized shareholders rather than executives. While corporations have “paid lip service” to the idea of preserving deductions, empirical research has shown only a marginal effect on executive compensation.17 Overall, however, executive compensation has continued to grow, and with it deductions have been forfeited.18 For example, the number of executives receiving salary in excess of $1 million increased from 563 in 2007 to 594 in 2018, and the number of executives receiving non-performance-based compensation in excess of $1 million increased from 3,379 in 2007 to 4,729 in 2018. This is despite a substantial decrease in the number of executives covered from 2007 to 2018 (see Table 1). Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions.

Consider Apple Inc. Duhigg and Kocieniewski (2018) detail how Apple avoids billions in taxes by setting up subsidiaries in low-tax jurisdictions. Yet when Apple made Tim Cook their CEO in August 2018, they gave him one million shares of restricted stock that vested purely with the passage of time, which therefore is not performance-based. Consequently, this grant, valued at $378 million at the time it was made, would not meet the performance-based exception of Section 162(m) and therefore would not be deductible—costing shareholders more than $100 million in additional taxes!

4. Tax benefits to corporations.

As noted above, compensation is normally deductible as an ordinary business expense under Section 162 of the Internal Revenue Code. This benefit can be large for the corporation and costly for the federal Treasury,19 as the corporate tax rate is 15 percent for taxable incomes under $50,000, 25 percent for those between $50,000 and $75,000, 34 percent for those between $75,000 and $100,000, 39 percent for those between $100,000 and $333,333, and 34 percent for taxable incomes between $333,333 and $10 million.20 Above $10 million, the rate increases to 35 percent (except between $15,000,000 and $18,333,333, where the tax rate is 38 percent). A reasonable assumption is that most public corporations have taxable incomes in excess of $100,000, so their tax rate would either be 34 or 35 percent.

For a number of reasons, such as tax deductions and credits, even large public corporations may pay taxes at a lower rate, or not at all—thus the tax benefit of executive compensation can be overstated. An example is Whirlpool Corporation, which, due to tax credits, did not pay taxes in 2018 and 2018. Whirlpool is not alone in this regard (for example, see the Goodyear excerpt above). So the question becomes: What is the value of the tax deductions associated with executive compensation to companies like Whirlpool? Note that if the corporation has a tax loss, as in the case of Whirlpool, it can use that loss to claim a refund on taxes paid in the previous two years or to shelter taxable income earned in the following 20 years. In theory, even if the company does not have any current taxable income, a $1 additional deduction will either increase this year’s tax refund by 35 cents, or reduce future taxes by 35 cents. But in practice, sometimes a company can’t claim the carryback because it hasn’t paid federal taxes in the past two years, and the existence of taxable income in the future may be uncertain as well. If so, how do we estimate the benefits of these deductions?

Academic researchers answer this question by estimating marginal tax rates, the rate of tax/benefit associated with the next dollar of income/deduction. Professor John Graham of Duke University, who has done extensive research in the area (see Graham 1996), provides estimates of these rates on his website, faculty. fuqua. duke. edu/

jgraham/taxform. html. Unfortunately, he does not provide tax rates for all companies in the Capital IQ data set. But for the approximately 25 percent of observations for which he does provide tax rates, the rates he provides are substantially lower than 35 percent, as the mean of his rates is slightly below 13 percent. As an alternative, in another paper (Graham and Mills 2008) he provides a fairly simple and less data-intensive method of calculating marginal tax rates. Using that algorithm still results in a sample reduction of about 30 percent, but perhaps a more realistic average tax rate of 25 percent. However, both rates are calculated after the impact of executive compensation, and Graham, Lang, and Shackelford (2004), among others, document that the stock-option deduction can significantly decrease marginal tax rates. So when calculating the average tax benefit of the executive compensation deductions, the relevant tax rate to use is something lower than 35 percent, yet is somewhat higher, perhaps significantly higher, than 13 or 25 percent. For this reason, Table 7 provides estimates using three alternative rates—15, 25, and 35 percent—while the following discussion uses what is probably the most realistic estimate, 25 percent.

Estimated tax savings/revenue loss as a result of executive compensation (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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Table 7 provides some boundaries for the aggregate tax savings to companies and costs to the Treasury using effective tax rates of 15, 25, and 35 percent. Using the 15 percent rate provides the lower bound on our estimate of the tax savings, which ranges from about $3.5 billion in 2009 to just under $6 billion in 2007. In contrast, using the 35 percent statutory federal rate provides an upper bound on our estimate of the aggregate tax benefits/cost to the U. S. Treasury, which ranges from about $13.7 billion in 2007 to $8.3 billion in 2009. If we assume a conservatively estimated 25 percent marginal tax rate, then revenue lost to the federal government in 2018 from deductible executive compensation was about $7 billion, and the total amount lost over the 2007–2018 period was $30.4 billion.

5. Looking back and forward.

While the data provided in this study do show a moderating of executive compensation over the study period 2007–2018, over a longer period it is well known that executive, in particular CEO, compensation has increased at rates far in excess of inflation and the wage growth of rank-and-file individuals. So the question exists: Is the moderating trend observed over the recent past a new paradigm, or is it merely one of the outcomes of the country’s severe financial crisis?

In terms of a new paradigm, 2018 marked a once-in-a-lifetime opportunity for shareholder empowerment. That July, the Dodd-Frank banking bill imposed the long-awaited “say-on-pay” on American corporations, which took effect with annual meetings on or after January 21, 2018. This provision, which was widely opposed by the business community, requires that publicly traded corporations provide their shareholders with a non-binding vote on their executive compensation at least once every three years. While the vote is (1) after the fact, i. e., shareholders are voting to approve compensation provided in the previous year, and (2) advisory, the possibility does exist that the board will moderate compensation to avoid being embarrassed by a negative outcome.21 In fact, Lucien Bebchuk of Harvard University notes in several of his papers that shame is perhaps the only constraint on executive compensation. Academic research in the United Kingdom, where say-on-pay has been in effect since 2002, and in the United States, by this author, suggests that say-on-pay can have a restraining impact on executive compensation under certain circumstances.

Another provision of the Dodd-Frank banking bill, which has not yet been implemented by the Securities and Exchange Commission, is the requirement that companies disclose the ratio of CEO compensation to that of the company’s median employee. This disclosure, which has been opposed by companies, also has the potential to embarrass corporate boards and CEOs, and if put into place, has the potential to restrain executive compensation.22.

But looking back, a reasonable question might be whether mandatory disclosure and tax penalties have worked to restrain compensation. In this author’s lifetime, the first big change in proxy statement disclosure was made in 1993. This disclosure, which dramatically increased the amount disclosed, inadvertently led to increased compensation, as executives at one company were able to more clearly assess what executives at their competitors were making. Section 280(g) of the Internal Revenue Code caused companies to forfeit deductions and imposed penalties on the recipient, if change-in-control payments (i. e., “golden parachutes”) were higher than allowed by the section. This Internal Revenue Code section did little, if anything, to curtail those payments, as companies without change-in-control payments added them, while those with change-in-control payments in excess of that allowed added the now-infamous tax gross-ups, whereby the shareholders would provide additional compensation to pay the executive’s tax penalty as well as the tax on that additional compensation. The same holds true for Section 162(m). Harris and Livingstone (2002) suggest that inadvertently, Section 162(m) may have encouraged increases in cash compensation for executives earning less than $1 million. Balsam and Ryan (2008) find that Section 162(m) resulted in increases in stock option compensation for executives earning more than $1 million in cash compensation. And although stock options were in favor amongst the political class when Section 162(m) was adopted, by the time the 21st century rolled around, the shine had worn off. In discussing the effect of Section 162(m) on the increased use of stock options, a 2006 Wall Street Journal article (Maremont and Forelle 2006) quoted Christopher Cox, the then-chairman of the Securities and Exchange Commission, as saying it deserves a “place in the museum of unintended consequences.”

The belief of this author is that executive compensation will recover in the near future, exceeding levels seen in 2007. Some of that increase will be in the form of deductible performance-based compensation, but the level of non-performance-based compensation will increase as well.

— EPI would like to thank the Stephen Silberstein Foundation for supporting its work on executive compensation.

— Steven Balsam is Professor of Accounting and Senior Merves Research Fellow at the Fox School of Business at Temple University. He has written several books on executive compensation including Executive Compensation: An Introduction to Practice and Theory , as well as published in the top academic and practitioner journals in accounting. Professor Balsam is also a member of the editorial boards of the Journal of Accounting and Public Policy and The International Journal of Accounting . He has been widely quoted in the media and has given expert witness testimony on executive compensation to the U. S. Senate Committee on Finance.

1. Covered individuals were originally defined as the chief executive officer plus the next four highest paid executive officers, as disclosed in the corporate proxy statement. However, in late 2006 the Securities and Exchange Commission changed the proxy statement disclosure requirements, so that corporations had to disclose compensation for the chief executive officer, chief financial officer, and next three highest paid executive officers. Since Section 162(m) does not specify the chief financial officer, covered individuals are now the chief executive officer plus the next three highest paid executive officers.

2. A change in control payment, also known as a golden parachute, is a payment to an executive that occurs when his or her company experiences a change in ownership.

3. For purposes of proxy statement reporting, awards pursuant to a written plan have been incorporated under the heading of “non-equity incentive plan compensation” since the end of 2006. It is common to combine the two categories of bonus and non-equity incentive plan compensation for other purposes.

4. This may not always be the case; even when there is a written plan, the plan may not meet Section 162(m) requirements. In a private letter ruling (irs. gov/pub/irs-wd/0804004.pdf) the IRS informed the company in question that compensation paid under its incentive plan would not qualify as performance-based, because the plan allowed for payments in the event of termination regardless of whether the performance conditions were met.

5. When the compensation is earned over a multiple year period, e. g., a two - or three-year performance period, the deduction would be taken in the last year of the period.

6. Sometimes rather than granting shares, companies grant units, which are then turned into shares upon vesting.

7. In most cases, meeting performance conditions is not a yes/no proposition. Typically, the percentage of shares that vest vary based upon performance, with a lesser number of shares vesting if performance meets the pre-established minimum threshold, the full grant vesting if performance meets the pre-established target, and possibly additional shares being earned if performance exceeds the target, up to a maximum that is usually defined as 200 percent of the original grant.

8. Normally a stock grant is not taxable to the recipient or deductible by the grantor until the restrictions expire. However, under tax code Section 83(b) the recipient may elect to have the grant taxed at the time of grant. Discussions with practitioners confirm these elections are rare in public companies.

9. Companies do not always clearly disclose whether their compensation qualifies as performance-based, nor do they disclose the amounts of deductions forfeited.

10. This discussion ignores Section 422 (tax-qualified or incentive) stock options. A Section 422 stock option provides benefits to its holder, as the tax event is not exercised, but rather the later sale of the shares is acquired upon exercise. Further, if certain conditions are met (for example, the shares are held from two years from the date of grant to one year from the date of exercise), the income is taxed as a capital gain and not ordinary income. While these options are beneficial to their holder, they are costly to the company, because if the holder meets the conditions for capital gain treatment, the company does not receive any tax deduction. However, because these options are limited to $100,000 in nominal value vesting per year and are considered tax-preference items at the time of exercise for purposes of the alternative minimum tax, they are not very useful (or used) in executive compensation. Thus we can safely ignore them in our discussion.

11. While pensions and deferred compensation need to be recognized as financial accounting expenses and disclosed in proxy statements in the year earned, for tax purposes they receive deferred recognition. Consequently, if deferred until the executive is no longer covered by Section 162(m) (e. g., post-retirement), they will be fully deductible for tax purposes.

12. This decrease is consistent with the decrease in publicly traded companies as documented in Stuart (2018). See cfo/article. cfm/14563859.

13. Since 2007, the Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals.

14. In theory, each company should have a CEO, but not all companies identify an individual as such in their filings. Consequently, the number of CEOs is slightly less than the number of companies in each year.

15. Capital IQ collects and we analyze the values as reported by companies in their proxy statements.

16. But do not have to, as illustrated by the excerpt from the Intel proxy statement above.

17. For example, Balsam and Ryan (2007) show that Section 162(m) increased the performance sensitivity of bonus payments for CEOs hired post-1994.

18. For more discussion on the forfeiture of deductions, see Balsam and Yin (2005).

19. This analysis only incorporates federal taxes. Incorporating state income taxes would increase the benefit associated with compensation deductions.

20. The 39 percent tax rate is intended to remove the benefits associated with the 15 percent and 25 percent rates.

21. In the first two years of say-on-pay, more than 98 percent of companies have had their executive compensation approved by shareholders, with the typical firm receiving a positive vote in excess of 80 percent. However, some well-known companies have had their executive compensation rejected by shareholders, including Hewlett-Packard in 2018 and Citigroup in 2018.

22. While the disclosure only applies to CEO compensation, compensation of other executives is often tied to that of the CEO.

المراجع.

Balsam, Steven, and David Ryan. 2007. “Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m).” Journal of Accounting, Auditing and Finance , vol. 22, no. 4, pp. 599–621.

Balsam, Steven, and David Ryan. 2008. “The Effect of Internal Revenue Code Section 162(m) on the Issuance of Stock Options.” Advances in Taxation , vol. 18, pp. 3–28.

Balsam, Steven, and Qin Jennifer Yin. 2005. “Explaining Firm Willingness to Forfeit.

Tax Deductions under Internal Revenue Code Section 162(m): The Million-dollar Cap.” Journal of Accounting and Public Policy , vol. 24, no. 4, pp. 300–324.

Capital IQ Database. 2018. Standard and Poor’s Financial Services LLC. capitaliq/home. aspx.

Duhigg, Charles, and David Kocieniewski. 2018. “How Apple Sidesteps Billions in Taxes.” New York Times , April 28. nytimes/2018/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations. html.

Graham, John R. 1996. “Proxies for the Corporate Marginal Tax Rate.” Journal of Financial Economics , vol. 42, no. 2, pp. 187–221.

Grassley, Chuck. 2006. “Executive Compensation: Backdating to the Future/Oversight of Current Issues Regarding Executive Compensation Including Backdating of Stock Options; and Tax Treatment of Executive Compensation, Retirement and Benefits.” Closing statement of Senator Chuck Grassley at a hearing of the U. S. Senate Finance Committee, September 6. finance. senate. gov/imo/media/doc/090606cga. pdf.

Graham, John R., Mark Lang, and Doug Shackelford. 2004. “Employee Stock Options, Corporate Taxes, and Debt Policy.” Journal of Finance , vol. 59, no. 4, pp. 1585–1618.

Graham, John R., and Lillian Mills. 2008. “Simulating Marginal Tax Rates Using Tax Return Data.” Journal of Accounting and Economics , vol. 46, no. 2–3, pp. 366–388.

Harris, David, and Jane Livingstone. 2002. “Federal Tax Legislation as a Political Cost Benchmark.” The Accounting Review , vol. 77 (October), pp. 997–1018.

Maremont, Mark, and Charles Forelle. 2006. “Bosses’ Pay: How Stock Options Became Part of the Problem – Once Seen as a Reform, They Grew Into Font of Riches And System to Be Gamed Reload, Reprice, Backdate.” The Wall Street Journal, December 27. online. wsj/article/SB116718927302760228-search. html.

Stuart, Alix. 2018. “Missing: Public Companies: Why Is the Number of Publicly Traded Companies in the U. S. Declining?” CFO, March 22. cfo/article. cfm/14563859.

U. S. House of Representatives. 1993. Fiscal Year Budget Reconciliation Recommendations of the Committee on Ways and Means. U. S. Government Printing Office.

Total deductible compensation (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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Section 162(m) Pitfalls.

It's proxy season. For public companies that rely on the performance-based compensation exception to the $1 million annual deduction limit under section 162(m) of the Internal Revenue Code (Code), that means it's time to adopt annual and long-term incentive plans, set performance goals, certify attainment of performance goals from prior-year plans, disclose performance targets, and address the deductibility of executive compensation in their annual Compensation Discussion and Analysis disclosures.

We have highlighted below several common compliance pitfalls that can be fatal to qualifying for the section 162(m) performance-based compensation exception. Public companies should review their performance-based compensation arrangements in light of these pitfalls to maximize their tax deduction for compensation paid to their top executives.

Common Section 162(m) Pitfalls.

Permitting payment of performance-based compensation upon retirement, involuntary termination, or termination for good reason . Pursuant to IRS Revenue Ruling 2008-13, compensation payable for performance periods beginning after January 1, 2009 or paid under employment agreements entered into after February 21, 2008 (or that are renewed or extended after that date, including automatic renewals or extensions) will not qualify as performance-based if it may be paid without regard to whether the performance goals are met when the executive retires, is involuntarily terminated without cause, or terminates employment for good reason. This rule applies without regard to whether any of these events actually occur or the performance goals are in fact attained; the mere presence of the provision disqualifies the arrangement.[1] Therefore, companies should review their employment contracts, severance agreements, and other compensation arrangements to see if performance-based arrangements intended to comply with section 162(m) could be payable on retirement, involuntary termination, or termination for good reason.

Allowing directors who are not "outside directors" to serve on the committee authorizing and administering section 162(m) performance-based compensation. To qualify as performance-based compensation, compensation must be awarded and administered by a committee composed solely of two or more "outside directors." "Outside directors" are defined as directors who are not former employees or current or former officers (including directors who acted as interim officers depending on the circumstances)[2] and who generally do not receive remuneration other than director compensation from the corporation. Satisfying the NYSE or NASDAQ requirements for independent directors or the SEC requirements for nonemployee directors under Rule 16b-3 (while generally mandatory) is not sufficient-the section 162(m) requirements are different (and can be more restrictive).

Using a performance goal that is not based on the business criteria approved by shareholders. Compensation other than stock options and stock appreciation rights (SARs) granted with an exercise price at least equal to grant date fair market value will qualify as performance-based compensation only if it is paid solely on the attainment of one or more pre-established, objective performance goals, based upon business criteria approved by shareholders. The compensation committee may not deviate from the business criteria listed in the shareholder-approved plan. These criteria need not be specific as to the exact targets being used. For example, the plan need not be so specific as to provide that the performance goal is a 10% increase in earnings per share. Rather, the plan need only provide that the performance goal may be based on earnings per share. However, pursuant to the SEC's compensation proxy disclosure requirements, a company must annually disclose and analyze the specific performance criteria and targets in its Compensation Discussion and Analysis unless the disclosure involves confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to the company.

Failing to obtain shareholder reapproval of business criteria upon which performance goals are based. The specific targets that must be satisfied under a performance goal need not be approved by shareholders. However, if the compensation committee has the authority to change the targets under a performance goal from year to year after shareholders have approved the business criteria upon which performance goals are based, the business criteria must be disclosed to and re-approved by shareholders at least every five years. Therefore, if shareholders last approved the business criteria in a plan in 2005, the business criteria should be submitted to shareholders for reapproval in 2018. The material terms of the performance goals that must be reapproved include (1) the class of eligible employees, (2) the types of business criteria on which the payouts or vesting for performance-based awards are based, and (3) the maximum amounts of cash or shares that can be provided during a specified period to any employee for performance-based awards under the plan.

Failing to establish the performance goals on a timely basis or making changes to the performance goals or targets. The performance goals must be established in writing no later than 90 days after the beginning of the service period to which the performance goals relate (or before 25% of such service period has elapsed) and at a time when the outcome is substantially uncertain. For calendar-year service (and performance) periods, this means that the performance goals for an annual plan must be established by March 31, 2018. The performance goals cannot be changed after this initial period.

Paying compensation when the performance goals were not attained. To qualify as performance-based compensation, compensation must be paid solely on the attainment of one or more objective performance goals. In the current economic environment, many companies did not attain their performance goals and may be considering paying their executives discretionary bonuses for their efforts in 2009. A word of caution: a discretionary bonus would not qualify for the performance-based exception, and could also jeopardize the performance-based exception for prior or future bonuses, if the facts and circumstances indicate that performance-based compensation is paid regardless of performance. On the flip side, compensation payable on account of attaining the performance goal must not exceed the limit that was approved by shareholders, and the plan should not provide the compensation committee discretion to pay more than the authorized amount.

Adjusting bonus amounts for subsequent events if such an adjustment is not included in the performance goal formula. To qualify as performance-based, compensation must be payable under an objective formula for computing the amount payable if a certain goal is attained. It is possible to adjust performance measures for certain objective subsequent events (for example , reorganization and restructuring programs or other executive termination costs, integration and other one-time expenditures, the sale or acquisition of a business unit); however, this feature must be included in the performance goal formula when it is initially established, and cannot be added at the end of the performance period. If unanticipated circumstances arise, the compensation committee can use its discretion to reduce the payout to the desired level based on the circumstances, but the payment cannot be increased to disregard the impact of subsequent events if no adjustment mechanism is present.

Increasing the amount of compensation that would otherwise be due upon attainment of the performance goals. Compensation will not qualify as performance-based if the compensation committee has discretion to increase the amount payable upon attainment of the performance goals. However, the committee may have discretion to reduce the payment.

Paying awards or bonuses without compensation committee certification that the performance goals were satisfied. Compensation committees must certify that the performance goals have been met in order for amounts paid upon attainment of those goals to be deductible under section 162(m). This applies to any bonuses or awards, including the vesting of equity awards based on performance. This certification should be included in the compensation committee minutes.

Misstating or omitting required terms that must be approved by shareholders for compensation to qualify as performance-based. The material terms that must be approved by shareholders include the maximum amount of compensation that could be paid to any employee or the formula used to calculate the amount of compensation to be paid to individual employees if certain performance goals are attained, the employees eligible to receive the compensation, and a description of the business criteria on which the performance goals are based. The description of the compensation payable must be specific enough so that shareholders can determine the maximum amount that could be paid to any employee during a specified period. With respect to options and SARs, the plan must state the maximum number of shares with respect to which options or SARs may be granted during a specified period to any employee.

Granting stock options or SARs in excess of the plan's limit or the amount that can be awarded to an individual in a specified time period. Stock options and SARs must be granted under a shareholder-approved plan that contains a limit on the maximum number of options or SARs that may be granted to any employee in a specified period and the exercise price.

Allowing inside directors to participate in granting stock options or SARs . Stock options and SARs must be granted by "outside directors" in accordance with a shareholder-approved plan in order to qualify as performance-based compensation under section 162(m).

Granting discounted stock options or SARs. The exercise price (or measurement) of stock options and SARs intended to qualify with section 162(m) (and to be exempt from Code section 409A) must not be less than the fair market value of the underlying stock on the grant date-the amount of the compensation that the employee can receive must be based solely on an increase in the value of the stock after the grant date. A recent IRS generic Legal Advice Memorandum, dated July 6, 2009, emphasizes that discounted stock options or SARs can never qualify as performance-based compensation under section 162(m) and states that discounted options and SARs cannot be cured for purposes of qualifying as performance-based compensation under section 162(m).

Not contemporaneously documenting stock option and SAR grants or failing to document grants altogether. Even though the section 162(m) regulations do not require formal committee meetings to grant options or SARs or even prompt documentation of those grants, on audit the IRS has taken the position that options are discounted (and thus do not qualify as performance-based compensation under section 162(m)) when grants are documented weeks after the grant date using "as of" grant dates or unanimous written consents (UWCs), when there is no contemporaneous documentation of compensation committee meetings or when there are only oral authorizations from the board or the compensation committee. In the event that the IRS determines that it is not possible to determine the grant date, the IRS will use the financial accounting measurement date as a proxy for the grant date. To avoid this challenge, the compensation committee should be precise about when an option or SAR is granted and complete all corporate documentation in a timely manner, for example, by preparing, signing, and dating the committee minutes or UWCs at the committee meeting, or within a day or two after the meeting or after the decision is made to grant options or SARs. This also raises a question about "best practices" for granting equity compensation.

Granting stock options or SARs or paying other compensation under a plan that was not approved by shareholders.

Materially amending a plan without shareholder approval.

For companies having an IPO, failing to obtain shareholder approval of a pre-IPO plan before the first shareholders meeting following the end of the third calendar year after the IPO.

Accelerating the payment date of performance-based compensation without reducing the payment amount to reflect the time value of money.

Companies can mitigate the adverse effect of failing to comply with section 162(m) by requiring deferrals of any amounts that would not be deductible by the company to a date after the employee's termination of employment. Forcing executives to assume the credit risk in difficult economic times may be met with resistance, however. Also, keep in mind that any such deferral must be made in accordance with section 409A.

Companies should consider instituting clawback policies with respect to performance-based compensation. A clawback policy allows the company to recover compensation if subsequent review indicates that payments were not calculated accurately or performance goals were not met.

If you have any questions or would like more information on any of the issues discussed in this Hot Topics alert, please contact any of the following Morgan Lewis attorneys:

[1] Compensation may qualify as performance-based even if the plan allows the compensation to be payable upon death, disability, or change of ownership or control without attainment of the performance goals. The regulations also warn that compensation actually paid on account of those events would not qualify as performance-based. However, separate exceptions generally ensure a deduction for such payments, since the payees (after the death or disability of an executive) or the payor (in the event of a change in control) are likely exempt from section 162(m) in any event.

[2] Whether a director who serves as an interim officer qualifies as "outside director" depends on the facts and circumstances. In Revenue Ruling 2008-32, the IRS concluded that a director did not qualify as an "outside director" based on the following facts: (1) the company employed the director for an indefinite period of time to serve as interim CEO with the full authority invested in that office; (2) the director was in regular and continuous service for nearly a year; (3) the director was not employed for a special or single transaction; and (4) the director did not merely have the title of "officer." However, under case law long predating section 162(m), absent one or more of these cited conditions, an "interim officer" may not necessarily meet the definition of "officer," and thus may still qualify as an "outside director."

موارد ذات الصلة.

Regions.

حقوق الطبع والنشر & # 169؛ 2017 مورغان، لويس & أمب؛ بوكيوس لب. كل الحقوق محفوظة.

26 CFR 1.162-27 - Certain employee remuneration in excess of $1,000,000.

(a) Scope. This section provides rules for the application of the $1 million deduction limit under section 162(m) of the Internal Revenue Code. Paragraph (b) of this section provides the general rule limiting deductions under section 162(m). Paragraph (c) of this section provides definitions of generally applicable terms. Paragraph (d) of this section provides an exception from the deduction limit for compensation payable on a commission basis. Paragraph (e) of this section provides an exception for qualified performance-based compensation. Paragraphs (f) and (g) of this section provide special rules for corporations that become publicly held corporations and payments that are subject to section 280G, respectively. Paragraph (h) of this section provides transition rules, including the rules for contracts that are grandfathered and not subject to section 162(m). Paragraph (j) of this section contains the effective date provisions. For rules concerning the deductibility of compensation for services that are not covered by section 162(m) and this section, see section 162(a)(1) and § 1.162-7. This section is not determinative as to whether compensation meets the requirements of section 162(a)(1).

(b) Limitation on deduction. Section 162(m) precludes a deduction under chapter 1 of the Internal Revenue Code by any publicly held corporation for compensation paid to any covered employee to the extent that the compensation for the taxable year exceeds $1,000,000.

(1) Publicly held corporation -

(i) General rule. A publicly held corporation means any corporation issuing any class of common equity securities required to be registered under section 12 of the Exchange Act. A corporation is not considered publicly held if the registration of its equity securities is voluntary. For purposes of this section, whether a corporation is publicly held is determined based solely on whether, as of the last day of its taxable year, the corporation is subject to the reporting obligations of section 12 of the Exchange Act.

(ii) Affiliated groups. A publicly held corporation includes an affiliated group of corporations, as defined in section 1504 (determined without regard to section 1504(b)). For purposes of this section, however, an affiliated group of corporations does not include any subsidiary that is itself a publicly held corporation. Such a publicly held subsidiary, and its subsidiaries (if any), are separately subject to this section. If a covered employee is paid compensation in a taxable year by more than one member of an affiliated group, compensation paid by each member of the affiliated group is aggregated with compensation paid to the covered employee by all other members of the group. Any amount disallowed as a deduction by this section must be prorated among the payor corporations in proportion to the amount of compensation paid to the covered employee by each such corporation in the taxable year.

(2) Covered employee -

(i) General rule. A covered employee means any individual who, on the last day of the taxable year, is -

(A) The chief executive officer of the corporation or is acting in such capacity; أو.

(B) Among the four highest compensated officers (other than the chief executive officer).

(ii) Application of rules of the Securities and Exchange Commission. Whether an individual is the chief executive officer described in paragraph (c)(2)(i)(A) of this section or an officer described in paragraph (c)(2)(i)(B) of this section is determined pursuant to the executive compensation disclosure rules under the Exchange Act.

(i) In general. For purposes of the deduction limitation described in paragraph (b) of this section, compensation means the aggregate amount allowable as a deduction under chapter 1 of the Internal Revenue Code for the taxable year (determined without regard to section 162(m)) for remuneration for services performed by a covered employee, whether or not the services were performed during the taxable year.

(ii) Exceptions. Compensation does not include -

(A) Remuneration covered in section 3121(a)(5)(A) through section 3121(a)(5)(D) (concerning remuneration that is not treated as wages for purposes of the Federal Insurance Contributions Act); و.

(B) Remuneration consisting of any benefit provided to or on behalf of an employee if, at the time the benefit is provided, it is reasonable to believe that the employee will be able to exclude it from gross income. In addition, compensation does not include salary reduction contributions described in section 3121(v)(1).

(4) Compensation Committee. The compensation committee means the committee of directors (including any subcommittee of directors) of the publicly held corporation that has the authority to establish and administer performance goals described in paragraph (e)(2) of this section, and to certify that performance goals are attained, as described in paragraph (e)(5) of this section. A committee of directors is not treated as failing to have the authority to establish performance goals merely because the goals are ratified by the board of directors of the publicly held corporation or, if applicable, any other committee of the board of directors. See paragraph (e)(3) of this section for rules concerning the composition of the compensation committee.

(5) Exchange Act. The Exchange Act means the Securities Exchange Act of 1934.

(6) Examples. This paragraph (c) may be illustrated by the following examples:

(d) Exception for compensation paid on a commission basis. The deduction limit in paragraph (b) of this section shall not apply to any compensation paid on a commission basis. For this purpose, compensation is paid on a commission basis if the facts and circumstances show that it is paid solely on account of income generated directly by the individual performance of the individual to whom the compensation is paid. Compensation does not fail to be attributable directly to the individual merely because support services, such as secretarial or research services, are utilized in generating the income. However, if compensation is paid on account of broader performance standards, such as income produced by a business unit of the corporation, the compensation does not qualify for the exception provided under this paragraph (d).

(e) Exception for qualified performance-based compensation -

(1) بشكل عام. The deduction limit in paragraph (b) of this section does not apply to qualified performance-based compensation. Qualified performance-based compensation is compensation that meets all of the requirements of paragraphs (e)(2) through (e)(5) of this section.

(2) Performance goal requirement -

(i) Preestablished goal. Qualified performance-based compensation must be paid solely on account of the attainment of one or more preestablished, objective performance goals. A performance goal is considered preestablished if it is established in writing by the compensation committee not later than 90 days after the commencement of the period of service to which the performance goal relates, provided that the outcome is substantially uncertain at the time the compensation committee actually establishes the goal. However, in no event will a performance goal be considered to be preestablished if it is established after 25 percent of the period of service (as scheduled in good faith at the time the goal is established) has elapsed. A performance goal is objective if a third party having knowledge of the relevant facts could determine whether the goal is met. Performance goals can be based on one or more business criteria that apply to the individual, a business unit, or the corporation as a whole. Such business criteria could include, for example, stock price, market share, sales, earnings per share, return on equity, or costs. A performance goal need not, however, be based upon an increase or positive result under a business criterion and could include, for example, maintaining the status quo or limiting economic losses (measured, in each case, by reference to a specific business criterion). A performance goal does not include the mere continued employment of the covered employee. Thus, a vesting provision based solely on continued employment would not constitute a performance goal. See paragraph (e)(2)(vi) of this section for rules on compensation that is based on an increase in the price of stock.

(ii) Objective compensation formula. A preestablished performance goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the employee if the goal is attained. A formula or standard is objective if a third party having knowledge of the relevant performance results could calculate the amount to be paid to the employee. In addition, a formula or standard must specify the individual employees or class of employees to which it applies.

(A) The terms of an objective formula or standard must preclude discretion to increase the amount of compensation payable that would otherwise be due upon attainment of the goal. A performance goal is not discretionary for purposes of this paragraph (e)(2)(iii) merely because the compensation committee reduces or eliminates the compensation or other economic benefit that was due upon attainment of the goal. However, the exercise of negative discretion with respect to one employee is not permitted to result in an increase in the amount payable to another employee. Thus, for example, in the case of a bonus pool, if the amount payable to each employee is stated in terms of a percentage of the pool, the sum of these individual percentages of the pool is not permitted to exceed 100 percent. If the terms of an objective formula or standard fail to preclude discretion to increase the amount of compensation merely because the amount of compensation to be paid upon attainment of the performance goal is based, in whole or in part, on a percentage of salary or base pay and the dollar amount of the salary or base pay is not fixed at the time the performance goal is established, then the objective formula or standard will not be considered discretionary for purposes of this paragraph (e)(2)(iii) if the maximum dollar amount to be paid is fixed at that time.

(B) If compensation is payable upon or after the attainment of a performance goal, and a change is made to accelerate the payment of compensation to an earlier date after the attainment of the goal, the change will be treated as an increase in the amount of compensation, unless the amount of compensation paid is discounted to reasonably reflect the time value of money. If compensation is payable upon or after the attainment of a performance goal, and a change is made to defer the payment of compensation to a later date, any amount paid in excess of the amount that was originally owed to the employee will not be treated as an increase in the amount of compensation if the additional amount is based either on a reasonable rate of interest or on one or more predetermined actual investments (whether or not assets associated with the amount originally owed are actually invested therein) such that the amount payable by the employer at the later date will be based on the actual rate of return of a specific investment (including any decrease as well as any increase in the value of an investment). If compensation is payable in the form of property, a change in the timing of the transfer of that property after the attainment of the goal will not be treated as an increase in the amount of compensation for purposes of this paragraph (e)(2)(iii). Thus, for example, if the terms of a stock grant provide for stock to be transferred after the attainment of a performance goal and the transfer of the stock also is subject to a vesting schedule, a change in the vesting schedule that either accelerates or defers the transfer of stock will not be treated as an increase in the amount of compensation payable under the performance goal.

(C) Compensation attributable to a stock option, stock appreciation right, or other stock-based compensation does not fail to satisfy the requirements of this paragraph (e)(2) to the extent that a change in the grant or award is made to reflect a change in corporate capitalization, such as a stock split or dividend, or a corporate transaction, such as any merger of a corporation into another corporation, any consolidation of two or more corporations into another corporation, any separation of a corporation (including a spinoff or other distribution of stock or property by a corporation), any reorganization of a corporation (whether or not such reorganization comes within the definition of such term in section 368), or any partial or complete liquidation by a corporation.

(iv) Grant-by-grant determination. The determination of whether compensation satisfies the requirements of this paragraph (e)(2) generally shall be made on a grant-by-grant basis. Thus, for example, whether compensation attributable to a stock option grant satisfies the requirements of this paragraph (e)(2) generally is determined on the basis of the particular grant made and without regard to the terms of any other option grant, or other grant of compensation, to the same or another employee. As a further example, except as provided in paragraph (e)(2)(vi), whether a grant of restricted stock or other stock-based compensation satisfies the requirements of this paragraph (e)(2) is determined without regard to whether dividends, dividend equivalents, or other similar distributions with respect to stock, on such stock-based compensation are payable prior to the attainment of the performance goal. Dividends, dividend equivalents, or other similar distributions with respect to stock that are treated as separate grants under this paragraph (e)(2)(iv) are not performance-based compensation unless they separately satisfy the requirements of this paragraph (e)(2).

(v) Compensation contingent upon attainment of performance goal. Compensation does not satisfy the requirements of this paragraph (e)(2) if the facts and circumstances indicate that the employee would receive all or part of the compensation regardless of whether the performance goal is attained. Thus, if the payment of compensation under a grant or award is only nominally or partially contingent on attaining a performance goal, none of the compensation payable under the grant or award will be considered performance-based. For example, if an employee is entitled to a bonus under either of two arrangements, where payment under a nonperformance-based arrangement is contingent upon the failure to attain the performance goals under an otherwise performance-based arrangement, then neither arrangement provides for compensation that satisfies the requirements of this paragraph (e)(2). Compensation does not fail to be qualified performance-based compensation merely because the plan allows the compensation to be payable upon death, disability, or change of ownership or control, although compensation actually paid on account of those events prior to the attainment of the performance goal would not satisfy the requirements of this paragraph (e)(2). As an exception to the general rule set forth in the first sentence of paragraph (e)(2)(iv) of this section, the facts-and-circumstances determination referred to in the first sentence of this paragraph (e)(2)(v) is made taking into account all plans, arrangements, and agreements that provide for compensation to the employee.

(vi) Application of requirements to stock options and stock appreciation rights -

(A) In general. Compensation attributable to a stock option or a stock appreciation right is deemed to satisfy the requirements of this paragraph (e)(2) if the grant or award is made by the compensation committee; the plan under which the option or right is granted states the maximum number of shares with respect to which options or rights may be granted during a specified period to any individual employee; and, under the terms of the option or right, the amount of compensation the employee may receive is based solely on an increase in the value of the stock after the date of the grant or award. A plan may satisfy the requirement to provide a maximum number of shares with respect to which stock options and stock appreciation rights may be granted to any individual employee during a specified period if the plan specifies an aggregate maximum number of shares with respect to which stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards that may be granted to any individual employee during a specified period under a plan approved by shareholders in accordance with § 1.162-27(e)(4). If the amount of compensation the employee may receive under the grant or award is not based solely on an increase in the value of the stock after the date of grant or award (for example, in the case of restricted stock, or an option that is granted with an exercise price that is less than the fair market value of the stock as of the date of grant), none of the compensation attributable to the grant or award is qualified performance-based compensation under this paragraph (e)(2)(vi)(A). Whether a stock option grant is based solely on an increase in the value of the stock after the date of grant is determined without regard to any dividend equivalent that may be payable, provided that payment of the dividend equivalent is not made contingent on the exercise of the option. The rule that the compensation attributable to a stock option or stock appreciation right must be based solely on an increase in the value of the stock after the date of grant or award does not apply if the grant or award is made on account of, or if the vesting or exercisability of the grant or award is contingent on, the attainment of a performance goal that satisfies the requirements of this paragraph (e)(2).

(B) Cancellation and repricing. Compensation attributable to a stock option or stock appreciation right does not satisfy the requirements of this paragraph (e)(2) to the extent that the number of options granted exceeds the maximum number of shares for which options may be granted to the employee as specified in the plan. If an option is canceled, the canceled option continues to be counted against the maximum number of shares for which options may be granted to the employee under the plan. If, after grant, the exercise price of an option is reduced, the transaction is treated as a cancellation of the option and a grant of a new option. In such case, both the option that is deemed to be canceled and the option that is deemed to be granted reduce the maximum number of shares for which options may be granted to the employee under the plan. This paragraph (e)(2)(vi)(B) also applies in the case of a stock appreciation right where, after the award is made, the base amount on which stock appreciation is calculated is reduced to reflect a reduction in the fair market value of stock.

(vii) Examples. This paragraph (e)(2) may be illustrated by the following examples:

(3) Outside directors -

(i) General rule. The performance goal under which compensation is paid must be established by a compensation committee comprised solely of two or more outside directors. A director is an outside director if the director -

(A) Is not a current employee of the publicly held corporation;

(B) Is not a former employee of the publicly held corporation who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year;

(C) Has not been an officer of the publicly held corporation; و.

(D) Does not receive remuneration from the publicly held corporation, either directly or indirectly, in any capacity other than as a director. For this purpose, remuneration includes any payment in exchange for goods or services.

(ii) Remuneration received. For purposes of this paragraph (e)(3), remuneration is received, directly or indirectly, by a director in each of the following circumstances:

(A) If remuneration is paid, directly or indirectly, to the director personally or to an entity in which the director has a beneficial ownership interest of greater than 50 percent. For this purpose, remuneration is considered paid when actually paid (and throughout the remainder of that taxable year of the corporation) and, if earlier, throughout the period when a contract or agreement to pay remuneration is outstanding.

(B) If remuneration, other than de minimis remuneration, was paid by the publicly held corporation in its preceding taxable year to an entity in which the director has a beneficial ownership interest of at least 5 percent but not more than 50 percent. For this purpose, remuneration is considered paid when actually paid or, if earlier, when the publicly held corporation becomes liable to pay it.

(C) If remuneration, other than de minimis remuneration, was paid by the publicly held corporation in its preceding taxable year to an entity by which the director is employed or self-employed other than as a director. For this purpose, remuneration is considered paid when actually paid or, if earlier, when the publicly held corporation becomes liable to pay it.

(iii) De minimis remuneration -

(A) In general. For purposes of paragraphs (e)(3)(ii)(B) and (C) of this section, remuneration that was paid by the publicly held corporation in its preceding taxable year to an entity is de minimis if payments to the entity did not exceed 5 percent of the gross revenue of the entity for its taxable year ending with or within that preceding taxable year of the publicly held corporation.

(B) Remuneration for personal services and substantial owners. Notwithstanding paragraph (e)(3)(iii)(A) of this section, remuneration in excess of $60,000 is not de minimis if the remuneration is paid to an entity described in paragraph (e)(3)(ii)(B) of this section, or is paid for personal services to an entity described in paragraph (e)(3)(ii)(C) of this section.

(iv) Remuneration for personal services. For purposes of paragraph (e)(3)(iii)(B) of this section, remuneration from a publicly held corporation is for personal services if -

(A) The remuneration is paid to an entity for personal or professional services, consisting of legal, accounting, investment banking, and management consulting services (and other similar services that may be specified by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin), performed for the publicly held corporation, and the remuneration is not for services that are incidental to the purchase of goods or to the purchase of services that are not personal services; و.

(B) The director performs significant services (whether or not as an employee) for the corporation, division, or similar organization (within the entity) that actually provides the services described in paragraph (e)(3)(iv)(A) of this section to the publicly held corporation, or more than 50 percent of the entity's gross revenues (for the entity's preceding taxable year) are derived from that corporation, subsidiary, or similar organization.

(v) Entity defined. For purposes of this paragraph (e)(3), entity means an organization that is a sole proprietorship, trust, estate, partnership, or corporation. The term also includes an affiliated group of corporations as defined in section 1504 (determined without regard to section 1504(b)) and a group of organizations that would be an affiliated group but for the fact that one or more of the organizations are not incorporated. However, the aggregation rules referred to in the preceding sentence do not apply for purposes of determining whether a director has a beneficial ownership interest of at least 5 percent or greater than 50 percent.

(vi) Employees and former officers. Whether a director is an employee or a former officer is determined on the basis of the facts at the time that the individual is serving as a director on the compensation committee. Thus, a director is not precluded from being an outside director solely because the director is a former officer of a corporation that previously was an affiliated corporation of the publicly held corporation. For example, a director of a parent corporation of an affiliated group is not precluded from being an outside director solely because that director is a former officer of an affiliated subsidiary that was spun off or liquidated. However, an outside director would no longer be an outside director if a corporation in which the director was previously an officer became an affiliated corporation of the publicly held corporation.

(vii) Officer. Solely for purposes of this paragraph (e)(3), officer means an administrative executive who is or was in regular and continued service. The term implies continuity of service and excludes those employed for a special and single transaction. An individual who merely has (or had) the title of officer but not the authority of an officer is not considered an officer. The determination of whether an individual is or was an officer is based on all of the facts and circumstances in the particular case, including without limitation the source of the individual's authority, the term for which the individual is elected or appointed, and the nature and extent of the individual's duties.

(viii) Members of affiliated groups. For purposes of this paragraph (e)(3), the outside directors of the publicly held member of an affiliated group are treated as the outside directors of all members of the affiliated group.

(ix) Examples. This paragraph (e)(3) may be illustrated by the following examples:

(ii) Thus, in 1998, 1999, and 2000, remuneration is considered paid by Corporation W indirectly to C personally under paragraph (e)(3)(ii)(A) of this section. Accordingly, in 1998, 1999, and 2000, C is not an outside director of Corporation W. The result would have been the same if Corporation W had obtained appropriate representations but nevertheless had reason to believe that it was paying remuneration indirectly to C personally.

(4) Shareholder approval requirement -

(i) General rule. The material terms of the performance goal under which the compensation is to be paid must be disclosed to and subsequently approved by the shareholders of the publicly held corporation before the compensation is paid. The requirements of this paragraph (e)(4) are not satisfied if the compensation would be paid regardless of whether the material terms are approved by shareholders. The material terms include the employees eligible to receive compensation; a description of the business criteria on which the performance goal is based; and either the maximum amount of compensation that could be paid to any employee or the formula used to calculate the amount of compensation to be paid to the employee if the performance goal is attained (except that, in the case of a formula based, in whole or in part, on a percentage of salary or base pay, the maximum dollar amount of compensation that could be paid to the employee must be disclosed).

(ii) Eligible employees. Disclosure of the employees eligible to receive compensation need not be so specific as to identify the particular individuals by name. A general description of the class of eligible employees by title or class is sufficient, such as the chief executive officer and vice presidents, or all salaried employees, all executive officers, or all key employees.

(iii) Description of business criteria -

(A) In general. Disclosure of the business criteria on which the performance goal is based need not include the specific targets that must be satisfied under the performance goal. For example, if a bonus plan provides that a bonus will be paid if earnings per share increase by 10 percent, the 10-percent figure is a target that need not be disclosed to shareholders. However, in that case, disclosure must be made that the bonus plan is based on an earnings-per-share business criterion. In the case of a plan under which employees may be granted stock options or stock appreciation rights, no specific description of the business criteria is required if the grants or awards are based on a stock price that is no less than current fair market value.

(B) Disclosure of confidential information. The requirements of this paragraph (e)(4) may be satisfied even though information that otherwise would be a material term of a performance goal is not disclosed to shareholders, provided that the compensation committee determines that the information is confidential commercial or business information, the disclosure of which would have an adverse effect on the publicly held corporation. Whether disclosure would adversely affect the corporation is determined on the basis of the facts and circumstances. If the compensation committee makes such a determination, the disclosure to shareholders must state the compensation committee's belief that the information is confidential commercial or business information, the disclosure of which would adversely affect the company. In addition, the ability not to disclose confidential information does not eliminate the requirement that disclosure be made of the maximum amount of compensation that is payable to an individual under a performance goal. Confidential information does not include the identity of an executive or the class of executives to which a performance goal applies or the amount of compensation that is payable if the goal is satisfied.

(iv) Description of compensation. Disclosure as to the compensation payable under a performance goal must be specific enough so that shareholders can determine the maximum amount of compensation that could be paid to any individual employee during a specified period. If the terms of the performance goal do not provide for a maximum dollar amount, the disclosure must include the formula under which the compensation would be calculated. Thus, if compensation attributable to the exercise of stock options is equal to the difference between the exercise price and the current value of the stock, then disclosure of the maximum number of shares for which grants may be made to any individual employee during a specified period and the exercise price of those options (for example, fair market value on date of grant) would satisfy the requirements of this paragraph (e)(4)(iv). In that case, shareholders could calculate the maximum amount of compensation that would be attributable to the exercise of options on the basis of their assumptions as to the future stock price.

(v) Disclosure requirements of the Securities and Exchange Commission. To the extent not otherwise specifically provided in this paragraph (e)(4), whether the material terms of a performance goal are adequately disclosed to shareholders is determined under the same standards as apply under the Exchange Act.

(vi) Frequency of disclosure. Once the material terms of a performance goal are disclosed to and approved by shareholders, no additional disclosure or approval is required unless the compensation committee changes the material terms of the performance goal. If, however, the compensation committee has authority to change the targets under a performance goal after shareholder approval of the goal, material terms of the performance goal must be disclosed to and reapproved by shareholders no later than the first shareholder meeting that occurs in the fifth year following the year in which shareholders previously approved the performance goal.

(vii) Shareholder vote. For purposes of this paragraph (e)(4), the material terms of a performance goal are approved by shareholders if, in a separate vote, a majority of the votes cast on the issue (including abstentions to the extent abstentions are counted as voting under applicable state law) are cast in favor of approval.

(viii) Members of affiliated group. For purposes of this paragraph (e)(4), the shareholders of the publicly held member of the affiliated group are treated as the shareholders of all members of the affiliated group.

(ix) Examples. This paragraph (e)(4) may be illustrated by the following examples:

(5) Compensation committee certification. The compensation committee must certify in writing prior to payment of the compensation that the performance goals and any other material terms were in fact satisfied. For this purpose, approved minutes of the compensation committee meeting in which the certification is made are treated as a written certification. Certification by the compensation committee is not required for compensation that is attributable solely to the increase in the value of the stock of the publicly held corporation.

(f) Companies that become publicly held, spinoffs, and similar transactions -

(1) بشكل عام. In the case of a corporation that was not a publicly held corporation and then becomes a publicly held corporation, the deduction limit of paragraph (b) of this section does not apply to any remuneration paid pursuant to a compensation plan or agreement that existed during the period in which the corporation was not publicly held. However, in the case of such a corporation that becomes publicly held in connection with an initial public offering, this relief applies only to the extent that the prospectus accompanying the initial public offering disclosed information concerning those plans or agreements that satisfied all applicable securities laws then in effect. In accordance with paragraph (c)(1)(ii) of this section, a corporation that is a member of an affiliated group that includes a publicly held corporation is considered publicly held and, therefore, cannot rely on this paragraph (f)(1).

(2) Reliance period. Paragraph (f)(1) of this section may be relied upon until the earliest of -

(i) The expiration of the plan or agreement;

(ii) The material modification of the plan or agreement, within the meaning of paragraph (h)(1)(iii) of this section;

(iii) The issuance of all employer stock and other compensation that has been allocated under the plan; أو.

(iv) The first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the initial public offering occurs or, in the case of a privately held corporation that becomes publicly held without an initial public offering, the first calendar year following the calendar year in which the corporation becomes publicly held.

(3) Stock-based compensation. Paragraph (f)(1) of this section will apply to any compensation received pursuant to the exercise of a stock option or stock appreciation right, or the substantial vesting of restricted property, granted under a plan or agreement described in paragraph (f)(1) of this section if the grant occurs on or before the earliest of the events specified in paragraph (f)(2) of this section. This paragraph does not apply to any form of stock-based compensation other than the forms listed in the immediately preceding sentence. Thus, for example, compensation payable under a restricted stock unit arrangement or a phantom stock arrangement must be paid, rather than merely granted, on or before the occurrence of the earliest of the events specified in paragraph (f)(2) of this section in order for paragraph (f)(1) of this section to apply.

(4) Subsidiaries that become separate publicly held corporations -

(i) In general. If a subsidiary that is a member of the affiliated group described in paragraph (c)(1)(ii) of this section becomes a separate publicly held corporation (whether by spinoff or otherwise), any remuneration paid to covered employees of the new publicly held corporation will satisfy the exception for performance-based compensation described in paragraph (e) of this section if the conditions in either paragraph (f)(4)(ii) or (f)(4)(iii) of this section are satisfied.

(ii) Prior establishment and approval. Remuneration satisfies the requirements of this paragraph (f)(4)(ii) if the remuneration satisfies the requirements for performance-based compensation set forth in paragraphs (e)(2), (e)(3), and (e)(4) of this section (by application of paragraphs (e)(3)(viii) and (e)(4)(viii) of this section) before the corporation becomes a separate publicly held corporation, and the certification required by paragraph (e)(5) of this section is made by the compensation committee of the new publicly held corporation (but if the performance goals are attained before the corporation becomes a separate publicly held corporation, the certification may be made by the compensation committee referred to in paragraph (e)(3)(viii) of this section before it becomes a separate publicly held corporation). Thus, this paragraph (f)(4)(ii) requires that the outside directors and shareholders (within the meaning of paragraphs (e)(3)(viii) and (e)(4)(viii) of this section) of the corporation before it becomes a separate publicly held corporation establish and approve, respectively, the performance-based compensation for the covered employees of the new publicly held corporation in accordance with paragraphs (e)(3) and (e)(4) of this section.

(iii) Transition period. Remuneration satisfies the requirements of this paragraph (f)(4)(iii) if the remuneration satisfies all of the requirements of paragraphs (e)(2), (e)(3), and (e)(5) of this section. The outside directors (within the meaning of paragraph (e)(3)(viii) of this section) of the corporation before it becomes a separate publicly held corporation, or the outside directors of the new publicly held corporation, may establish and administer the performance goals for the covered employees of the new publicly held corporation for purposes of satisfying the requirements of paragraphs (e)(2) and (e)(3) of this section. The certification required by paragraph (e)(5) of this section must be made by the compensation committee of the new publicly held corporation. However, a taxpayer may rely on this paragraph (f)(4)(iii) to satisfy the requirements of paragraph (e) of this section only for compensation paid, or stock options, stock appreciation rights, or restricted property granted, prior to the first regularly scheduled meeting of the shareholders of the new publicly held corporation that occurs more than 12 months after the date the corporation becomes a separate publicly held corporation. Compensation paid, or stock options, stock appreciation rights, or restricted property granted, on or after the date of that meeting of shareholders must satisfy all requirements of paragraph (e) of this section, including the shareholder approval requirement of paragraph (e)(4) of this section, in order to satisfy the requirements for performance-based compensation.

(5) Example. The following example illustrates the application of paragraph (f)(4)(ii) of this section:

(g) Coordination with disallowed excess parachute payments. The $1,000,000 limitation in paragraph (b) of this section is reduced (but not below zero) by the amount (if any) that would have been included in the compensation of the covered employee for the taxable year but for being disallowed by reason of section 280G. For example, assume that during a taxable year a corporation pays $1,500,000 to a covered employee and no portion satisfies the exception in paragraph (d) of this section for commissions or paragraph (e) of this section for qualified performance-based compensation. Of the $1,500,000, $600,000 is an excess parachute payment, as defined in section 280G(b)(1) and is disallowed by reason of that section. Because the excess parachute payment reduces the limitation of paragraph (b) of this section, the corporation can deduct $400,000, and $500,000 of the otherwise deductible amount is nondeductible by reason of section 162(m).

(h) Transition rules -

(1) Compensation payable under a written binding contract which was in effect on February 17, 1993 -

(i) General rule. The deduction limit of paragraph (b) of this section does not apply to any compensation payable under a written binding contract that was in effect on February 17, 1993. The preceding sentence does not apply unless, under applicable state law, the corporation is obligated to pay the compensation if the employee performs services. However, the deduction limit of paragraph (b) of this section does apply to a contract that is renewed after February 17, 1993. A written binding contract that is terminable or cancelable by the corporation after February 17, 1993, without the employee's consent is treated as a new contract as of the date that any such termination or cancellation, if made, would be effective. Thus, for example, if the terms of a contract provide that it will be automatically renewed as of a certain date unless either the corporation or the employee gives notice of termination of the contract at least 30 days before that date, the contract is treated as a new contract as of the date that termination would be effective if that notice were given. Similarly, for example, if the terms of a contract provide that the contract will be terminated or canceled as of a certain date unless either the corporation or the employee elects to renew within 30 days of that date, the contract is treated as renewed by the corporation as of that date. Alternatively, if the corporation will remain legally obligated by the terms of a contract beyond a certain date at the sole discretion of the employee, the contract will not be treated as a new contract as of that date if the employee exercises the discretion to keep the corporation bound to the contract. A contract is not treated as terminable or cancelable if it can be terminated or canceled only by terminating the employment relationship of the employee.

(ii) Compensation payable under a plan or arrangement. If a compensation plan or arrangement meets the requirements of paragraph (h)(1)(i) of this section, the compensation paid to an employee pursuant to the plan or arrangement will not be subject to the deduction limit of paragraph (b) of this section even though the employee was not eligible to participate in the plan as of February 17, 1993. However, the preceding sentence does not apply unless the employee was employed on February 17, 1993, by the corporation that maintained the plan or arrangement, or the employee had the right to participate in the plan or arrangement under a written binding contract as of that date.

(iii) Material modifications.

(A) Paragraph (h)(1)(i) of this section will not apply to any written binding contract that is materially modified. A material modification occurs when the contract is amended to increase the amount of compensation payable to the employee. If a binding written contract is materially modified, it is treated as a new contract entered into as of the date of the material modification. Thus, amounts received by an employee under the contract prior to a material modification are not affected, but amounts received subsequent to the material modification are not treated as paid under a binding, written contract described in paragraph (h)(1)(i) of this section.

(B) A modification of the contract that accelerates the payment of compensation will be treated as a material modification unless the amount of compensation paid is discounted to reasonably reflect the time value of money. If the contract is modified to defer the payment of compensation, any compensation paid in excess of the amount that was originally payable to the employee under the contract will not be treated as a material modification if the additional amount is based on either a reasonable rate of interest or one or more predetermined actual investments (whether or not assets associated with the amount originally owed are actually invested therein) such that the amount payable by the employer at the later date will be based on the actual rate of return of the specific investment (including any decrease as well as any increase in the value of the investment).

(C) The adoption of a supplemental contract or agreement that provides for increased compensation, or the payment of additional compensation, is a material modification of a binding, written contract where the facts and circumstances show that the additional compensation is paid on the basis of substantially the same elements or conditions as the compensation that is otherwise paid under the written binding contract. However, a material modification of a written binding contract does not include a supplemental payment that is equal to or less than a reasonable cost-of-living increase over the payment made in the preceding year under that written binding contract. In addition, a supplemental payment of compensation that satisfies the requirements of qualified performance-based compensation in paragraph (e) of this section will not be treated as a material modification.

(iv) Examples. The following examples illustrate the exception of this paragraph (h)(1):

(2) Special transition rule for outside directors. A director who is a disinterested director is treated as satisfying the requirements of an outside director under paragraph (e)(3) of this section until the first meeting of shareholders at which directors are to be elected that occurs on or after January 1, 1996. For purposes of this paragraph (h)(2) and paragraph (h)(3) of this section, a director is a disinterested director if the director is disinterested within the meaning of Rule 16b-3(c)(2)(i), 17 CFR 240.16b-3(c)(2)(i), under the Exchange Act (including the provisions of Rule 16b-3(d)(3), as in effect on April 30, 1991).

(3) Special transition rule for previously-approved plans - (i) In general. Any compensation paid under a plan or agreement approved by shareholders before December 20, 1993, is treated as satisfying the requirements of paragraphs (e)(3) and (e)(4) of this section, provided that the directors administering the plan or agreement are disinterested directors and the plan was approved by shareholders in a manner consistent with Rule 16b-3(b), 17 CFR 240.16b-3(b), under the Exchange Act or Rule 16b-3(a), 17 CFR 240.16b-3(a) (as contained in 17 CFR part 240 revised April 1, 1990). In addition, for purposes of satisfying the requirements of paragraph (e)(2)(vi) of this section, a plan or agreement is treated as stating a maximum number of shares with respect to which an option or right may be granted to any employee if the plan or agreement that was approved by the shareholders provided for an aggregate limit, consistent with Rule 16b-3(b), 17 CFR 250.16b-3(b), on the shares of employer stock with respect to which awards may be made under the plan or agreement.

(ii) Reliance period. The transition rule provided in this paragraph (h)(3) shall continue and may be relied upon until the earliest of -

(A) The expiration or material modification of the plan or agreement;

(B) The issuance of all employer stock and other compensation that has been allocated under the plan; أو.

(C) The first meeting of shareholders at which directors are to be elected that occurs after December 31, 1996.

(iii) Stock-based compensation. This paragraph (h)(3) will apply to any compensation received pursuant to the exercise of a stock option or stock appreciation right, or the substantial vesting of restricted property, granted under a plan or agreement described in paragraph (h)(3)(i) of this section if the grant occurs on or before the earliest of the events specified in paragraph (h)(3)(ii) of this section.

(iv) Example. The following example illustrates the application of this paragraph (h)(3):

(j) Effective date -

(1) بشكل عام. Section 162(m) and this section apply to compensation that is otherwise deductible by the corporation in a taxable year beginning on or after January 1, 1994.

(2) Delayed effective date for certain provisions -

(i) Date on which remuneration is considered paid. Notwithstanding paragraph (j)(1) of this section, the rules in the second sentence of each of paragraphs (e)(3)(ii)(A), (e)(3)(ii)(B), and (e)(3)(ii)(C) of this section for determining the date or dates on which remuneration is considered paid to a director are effective for taxable years beginning on or after January 1, 1995. Prior to those taxable years, taxpayers must follow the rules in paragraphs (e)(3)(ii)(A), (e)(3)(ii)(B), and (e)(3)(ii)(C) of this section or another reasonable, good faith interpretation of section 162(m) with respect to the date or dates on which remuneration is considered paid to a director.

(ii) Separate treatment of publicly held subsidiaries. Notwithstanding paragraph (j)(1) of this section, the rule in paragraph (c)(1)(ii) of this section that treats publicly held subsidiaries as separately subject to section 162(m) is effective as of the first regularly scheduled meeting of the shareholders of the publicly held subsidiary that occurs more than 12 months after December 2, 1994. The rule for stock-based compensation set forth in paragraph (f)(3) of this section will apply for this purpose, except that the grant must occur before the shareholder meeting specified in this paragraph (j)(2)(ii). Taxpayers may choose to rely on the rule referred to in the first sentence of this paragraph (j)(2)(ii) for the period prior to the effective date of the rule.

(iii) Subsidiaries that become separate publicly held corporations. Notwithstanding paragraph (j)(1) of this section, if a subsidiary of a publicly held corporation becomes a separate publicly held corporation as described in paragraph (f)(4)(i) of this section, then, for the duration of the reliance period described in paragraph (f)(2) of this section, the rules of paragraph (f)(1) of this section are treated as applying (and the rules of paragraph (f)(4) of this section do not apply) to remuneration paid to covered employees of that new publicly held corporation pursuant to a plan or agreement that existed prior to December 2, 1994, provided that the treatment of that remuneration as performance-based is in accordance with a reasonable, good faith interpretation of section 162(m). However, if remuneration is paid to covered employees of that new publicly held corporation pursuant to a plan or agreement that existed prior to December 2, 1994, but that remuneration is not performance-based under a reasonable, good faith interpretation of section 162(m), the rules of paragraph (f)(1) of this section will be treated as applying only until the first regularly scheduled meeting of shareholders that occurs more than 12 months after December 2, 1994. The rules of paragraph (f)(4) of this section will apply as of that first regularly scheduled meeting. The rule for stock-based compensation set forth in paragraph (f)(3) of this section will apply for purposes of this paragraph (j)(2)(iii), except that the grant must occur before the shareholder meeting specified in the preceding sentence if the remuneration is not performance-based under a reasonable, good faith interpretation of section 162(m). Taxpayers may choose to rely on the rules of paragraph (f)(4) of this section for the period prior to the applicable effective date referred to in the first or second sentence of this paragraph (j)(2)(iii).

(iv) Bonus pools. Notwithstanding paragraph (j)(1) of this section, the rules in paragraph (e)(2)(iii)(A) that limit the sum of individual percentages of a bonus pool to 100 percent will not apply to remuneration paid before January 1, 2001, based on performance in any performance period that began prior to December 20, 1995.

(v) Compensation based on a percentage of salary or base pay. Notwithstanding paragraph (j)(1) of this section, the requirement in paragraph (e)(4)(i) of this section that, in the case of certain formulas based on a percentage of salary or base pay, a corporation disclose to shareholders the maximum dollar amount of compensation that could be paid to the employee, will apply only to plans approved by shareholders after April 30, 1995.

(vi) The modifications to paragraphs (e)(2)(vi)(A), (e)(2)(vii) Example 9, and (e)(4)(iv) of this section concerning the maximum number of shares with respect to which a stock option or stock appreciation right that may be granted and the amount of compensation that may be paid to any individual employee apply to compensation attributable to stock options and stock appreciation rights that are granted on or after June 24, 2018. The last two sentences of § 1.162-27(f)(3) apply to remuneration that is otherwise deductible resulting from a stock option, stock appreciation right, restricted stock (or other property), restricted stock unit, or any other form of equity-based remuneration that is granted on or after April 1, 2018.

This is a list of United States Code sections, Statutes at Large, Public Laws, and Presidential Documents, which provide rulemaking authority for this CFR Part.

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