CFOs of Smaller Reporting Companies May Be Considered “Covered Employees” for Purposes of Section 162(m)

The $1,000,000 limitation on deductions imposed by Section 162(m) of the Internal Revenue Code applies to “covered employees.” In Notice 2007-49, the IRS defined the term “covered employees” as follows:

“The IRS will interpret the term “covered employee” for purposes of § 162(m) to mean any employee of the taxpayer if, as of the close of the taxable year, such employee is the principal executive officer . . . of the taxpayer or an individual acting in such capacity, or if the total compensation of such employee for that taxable year is required to be reported to shareholders under the Exchange Act by reason of such employee being among the 3 highest compensated officers for the taxable year (other than the principal executive officer or the principal financial officer).”

Accordingly, since the release of Notice 2007-49, chief financial officers have been excluded from the definition of “covered employee” for purposes of Section 162(m) of the Code. Read More ›

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IRS Releases Clarifying 162(m) Regulations

The IRS recently released final regulations clarifying two aspects of the “performance-based compensation” exception to the $1,000,000 limit on deductible compensation paid to covered employees under Section 162(m) of the Internal Revenue Code.

Proposed regulations issued in 2011 provided that in order to qualify awards as “performance-based compensation” a shareholder approved equity plan must specify the maximum number of shares with respect to which options and stock appreciation rights may be granted during a specified period to any individual employee. Under the final regulations, a plan will satisfy this “per-employee limitation” requirement 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 may be granted to any individual employee during a specified period.  Read More ›

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ISS Issues FAQs on Equity Plan Scorecard

As reported in my October 24, 2014 post, Institutional Shareholder Services Inc. (“ISS”), a leading proxy advisory firm, has adopted a new “scorecard” approach to evaluating public company equity compensation plans.  In a recent set of FAQs, ISS offers additional guidance on how it will apply the new scorecard when analyzing equity plan proposals made on or after February 1, 2015.

Among other things, the FAQs clarify that regardless of other scorecard factors, the following equity plan features will continue to result in an “against” vote: (i) a liberal change in control definition that could result in vesting of awards by any trigger other than a full double trigger, (ii) provisions that permit the repricing and/or cash out of underwater options or stock appreciation rights without shareholder approval, (iii) provisions that make a plan a vehicle for problematic pay practices or create a pay for performance disconnect, and (iv) any other plan features that are detrimental to shareholder interests which may include tax gross-ups or reload options. Read More ›

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Public Companies Should Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2009

As reported in Part 1 of our End of Year Plan Sponsor “To Do” Lists, Section 162(m) of the Internal Revenue Code limits the deduction a public company may take for compensation payable to “covered employees” to $1,000,000 per year. “Performance-based compensation” that meets the requirements of Section 162(m) is not subject to this limitation. The Section 162(m) regulations require that, every five years, the shareholders reapprove the performance goals that determine the amount of “performance-based compensation” to be paid. This means that companies that obtained shareholder approval of plans containing Section 162(m) performance goals in 2009 must resubmit the plans for shareholder approval in 2014. Read More ›

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