United States: Time To Revisit Executive Compensation Arrangements In Light Of Recent Tax Reform

The Tax Cuts and Jobs Act of 2017 (the "Act") signed into law on December 22, 2017, will significantly impact many public company executive compensation plans and arrangements. Companies should take this opportunity to revisit their overall compensation design and consider whether changes are appropriate to enhance flexibility and/or better align compensation design with the company's business objectives. This alert highlights changes in the law affecting public company executive compensation arrangements and key considerations in revising compensation plans and arrangements and overall compensation program design. For additional information on the Act and its impact on executive compensation, please also see our earlier alert.

Act Highlights

  • The Act made major amendments to Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") (which caps deductible executive compensation at $1,000,000). However, unlike earlier drafts of the legislation, the final bill did not include any changes to deferred compensation arrangements under Code Section 409A, so the current complex rules continue to apply for deferred compensation subject to Code Section 409A. The changes brought about by the Act go into effect for taxable years beginning January 1, 2018. Amendments related to Code Section 162(m) include:
  • Performance-based Compensation Now Subject to $1M Deduction Cap. Previously, performance-based compensation meeting certain requirements was not subject to Code Section 162(m)'s $1,000,000 deduction limit. That performance-based compensation exception has been removed.
  • Covered Employee Definition Expanded. The list of covered employees has been expanded to include a company's CFO, in addition to its CEO and three other most highly compensated executive officers. Further, once an executive becomes a covered employee under Code Section 162(m) (effective for years beginning January 1, 2017), he or she will now be subject to the Code Section 162(m) $1,000,000 deduction limitation in all future years – including after termination. Finally, anyone who was a CEO or CFO during any part of a company's fiscal year (vs. being in service at year-end only) is now subject to Code Section 162(m). This change will have special impact for interim executives.
  • Certain Compensation Grandfathered. The Act provides a narrow transition rule that grandfathers the deductibility of certain performance-based compensation. To be eligible for this relief (i) a binding written contract must have been in effect on November 2, 2017 that gave the executive a right to participate under a plan and (ii) a company cannot materially amend or terminate the plan (except on a prospective basis before any services are performed with respect to the applicable period for which such compensation is to be paid). The fact that a plan was in existence on November 2, 2017 is not by itself sufficient to qualify the plan under the transition rule. Contracts that are unconditionally terminable at will (by either or both parties) without consent are considered new contracts on the effective date of such termination. It remains unclear whether a company's retention of negative discretion in regards to final plan payouts precludes grandfather treatment (i.e., on the basis the executive had no legally binding right to the compensation as of November 2, 2017). It is also unclear whether awards made pursuant to a written shareholder-approved annual cash incentive plan qualify for transition relief, given there is no written contract between the executive and company. Companies should watch for IRS clarification on these points.Definition of Publicly Held Corporation Expanded. The companies covered by Code Section 162(m) have been expanded to include all companies required to file SEC reports under Section 15(d) of the Securities Exchange of 1934, as amended (i.e., picking up companies required to report solely because of public debt).

Compensation Programs Ripe for Revisit and Revision

In light of the above-discussed amendments, companies should review their current compensation structures and assess whether modifications are in the best interest of the company. In particular, companies should consider:

Compensation Mix. While it is not advisable to completely forego performance-based awards in light of current industry best practices and proxy advisor focus on performance-based compensation, some companies may determine that changing their compensation mix is appropriate. For instance, stock options and SARs will no longer receive preferential Code Section 162(m) treatment as performance-based awards, so other award types may become more attractive. Some companies may also choose to increase salaries or discretionary bonuses as there is now no difference in deductibility of salary or any discretionary bonus versus performance-based compensation.

Stock and Cash Incentive Plans and Award Agreements. Companies should consider whether it is appropriate to cleanse their incentive plans and other compensation arrangements of former Code Section 162(m)-related restrictions. Absent amendment of these provisions, a company may unnecessarily subject itself to limitations. In particular, companies may want to amend incentive plans and award agreements (as applicable) to:

  • remove or revise individual award limits (other than the total number of incentive stock option shares that may be issued, as that requirement stems from Code Section 422);
  • permit positive discretion in determining final awards for covered employees (versus negative discretion only, as formerly mandated by Code Section162(m));
  • remove the requirement that shareholders approve performance metrics and eligibility criteria;
  • expand the list of performance metrics to include subjective performance criteria;
  • permit adjustment of performance goals during or after a performance period; and
  • remove any requirement that performance goals must be set within the first 90 days/25% of a performance period.

Companies should keep in mind that any new or materially amended plans will need to be reported to the SEC on a Form 8-K and filed with that report or their next periodic report. Likewise, companies should file any new or amended award agreements with their next periodic report.

Stock Incentive Plan Prospectuses. Prospectuses should be checked for any Code Section 162(m) tax disclosures and updated as appropriate.

Employment Agreements; Severance Plans/Agreements; and Change in Control Plans/ Agreements. These documents may have terms related to the deduction of performance-based compensation under Code Section 162(m) and should be reviewed. For instance, bonuses can now be paid out at "target" or a guaranteed level in the year of an executive's termination without a different tax consequence (i.e., consideration of actual performance is no longer relevant for Code Section 162(m) purposes).

Compensation Committee Charters. Charters should generally be reviewed and updated. For instance, committee charters frequently require Compensation Committees to be comprised of "outside directors" as defined under Code Section 162(m), such that the Compensation Committee is eligible to set and certify performance for Code Section 162(m) purposes. With the removal of the Code Section 162(m) performance-based exception, this requirement is rendered moot (except to the extent that a company has compensation that is eligible for transition relief as discussed above, in which case the Compensation Committee must continue to consist of "outside directors" under Code Section 162(m) for so long as such compensation is grandfathered). Therefore, the "outside director" reference may be removed from Compensation Committee charters and companies may disband any subcommittees of the Compensation Committee formed for 162(m) certification purposes.

Proxy Statement Disclosures. At a minimum, companies will need to indicate that they are subject to the $1,000,000 Code Section 162(m) deductibility cap and that the performance-based exception to this rule is no longer available going forward. The appropriate scope of the disclosure will depend on the materiality and impact of the Act's tax changes on a company. Companies should also consider their past disclosures regarding any intent to comply with Code Section 162(m) so as to avoid opening the door to shareholder suits. Finally, any company that pays compensation when performance goals are not met will be required to disclose such payments in their proxy statement and should be prepared to provide disclosure regarding why such payments were made.

Payroll Considerations. The Act's reduction in the tax rates for individuals impacts the tax rates used for federal tax withholding on equity awards. Companies should confirm that their payroll providers are prepared to implement any necessary changes in withholding rates so as to avoid adverse accounting consequences. Companies are also advised to check their relevant documents (e.g., stock plans, award agreements and implementing resolutions) to confirm that a change in the tax rate will not require any amendment.

Good Governance Considerations

While certain restrictions imposed under Code Section 162(m) may no longer apply, some of these limitations are matters of good governance that may be appropriate to continue. For instance, having the Compensation Committee certify compensation before it is paid and maintaining per person plan award limits may, in certain circumstances, serve as appropriate governance checks on increased company discretion. In addition, as noted above, proxy advisory firms such as Institutional Investor Services ("ISS") presumably will continue to expect rigorous performance objectives and tight controls on plan discretion.

Anticipated Guidance Likely to Limit Drastic Change to Compensation Plans/Programs

While many companies will want to revise their compensation programs in light of the changes brought about by the Act, companies may consider waiting to amend their incentive plans/compensation arrangements until the Internal Revenue Service ("IRS"), ISS and stock exchanges have provided relevant guidance. As discussed above, open questions remain regarding the availability of the transition rule in particular on which the IRS is expected to issue guidance. As material changes to compensation agreements (and the underlying plans) may terminate the availability of grandfather relief, companies should generally avoid making any changes to existing compensation-related agreements or plan documents until the IRS has issued guidance. Further, plan amendments and other changes to compensation arrangements may be viewed unfavorably by proxy advisors like ISS. ISS considers the use of performance-based awards a best practice. It also considers it a problematic pay practice to change, cancel or replace performance metrics during a performance period without adequate explanation. Further, broad discretion regarding the vesting of awards that can result in "pay for failure" can negatively impact a plan's ISS EPSC score, which determines whether ISS will recommend a vote in favor of or against a plan. Without further guidance from ISS, companies amending their plan documents may unknowingly implement disfavored compensation structures and be penalized. ISS issued its 2018 proxy guidance in early December 2017, before the passage of the Act, and has not supplemented its guidance to address the Act at this time. It is unknown when relevant guidance will be issued; however, one can assume ISS will provide greater clarity on its performance-based compensation expectations given its past focus in this area. Finally, stock exchanges may issue guidance regarding shareholder approval requirements in connection with amending a plan to address the changes to Code Section 162(m). For these reasons, most companies should proceed cautiously before amending plans and other compensation arrangements.


Although the loss of the performance-based deduction exception is a setback for public companies from a tax perspective (albeit the Act provides for corporate taxes at a lower rate), the tax changes implemented by the Act provide companies with an opportunity to enhance the design of their compensation plans and programs. In light of the changes to Code Section 162(m), compensation programs may become more flexible, simpler and easier to administer. However, before making any changes to compensation plans and other arrangements, companies should watch for guidance from the IRS, ISS and stock exchanges in addition to thoughtfully considering governance best practices that best serve the interests of the particular company and its shareholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions