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Proskauer's ERISA Practice Center Blog The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Proposed Legislation Threatens Executive Compensation Tax Deductions

Posted in 162(m), Executive Compensation, Legislation

In early August, U.S. Senators Jack Reed and Richard Blumenthal introduced the “Stop Subsidizing Multimillion Dollar Corporate Bonuses Act” (S. 1476) in the U.S. Senate. The proposed bill would significantly expand the scope of Section 162(m) of the Internal Revenue Code. Section 162(m) currently limits the deductibility of compensation paid in excess of $1 million to a publicly traded company’s currently employed chief executive officer and its three other highest compensated officers (other than its chief financial officer). Section 162(m) includes exceptions from the limits for certain commissions and qualified performance-based compensation.

Specifically, the bill proposes:

  1. To eliminate the existing Section 162(m) exceptions for commission payments and qualified performance-based compensation;
  2. To include all current and former employees (whether or not they are or were ever executive officers) within the scope of Section 162(m); and
  3. To impose the limitations of Section 162(m) to public companies subject to periodic reporting under Section 15(d) of the Exchange Act (not just public corporations with securities registered under Section 12 of the Exchange Act, as is currently the case).

If this bill were ever to become law, it would essentially eliminate all tax deductions for compensation in excess of $1 million paid by publicly held companies to all of their current and former employees. It could also have unintended consequences, however, by discouraging public companies from continuing certain performance-based compensation programs and by taking away certain incentives a public company otherwise would have in designing equity and cash bonus plans. For example, in order to qualify for the performance-based compensation exception to Section 162(m), affected companies have to seek shareholder approval of their annual cash bonus plans, including the applicable performance goals and maximum annual payments. If the Section 162(m) exception does not apply and this compensation is no longer deductible, companies may not have the tax incentive to seek shareholder approval. Further, in order to qualify for the performance-based exception to Section 162(m), compensation committees must set objective performance goals and are prohibited from exercising discretion to increase compensation during or after the applicable performance period; this bill could potentially encourage the greater use of subjective performance metrics and the greater exercise of discretion as compared to current practices.

Although it may be unlikely that the bill will become law, it is another example of the political/legislative scrutiny of executive compensation and calls for reform and regulation, and undoubtedly not the last one.