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News Items, by Subject

Executive benefits

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Disclosure of the CEO Pay Ratio: Potential Impact on Stakeholders
"Investors may have a different point of view after several years of seeing disclosures of the CEO Pay Ratio and the Median Employee Pay and changes in each of these.... Many employees will be upset to learn, as part of the CEO Pay Ratio disclosure, that their pay levels are below the Median Employee Pay level at their employer ... An important effect of the pay and pay ratio disclosures ... may be an upward pressure on employee pay levels." (McCarter & English LLP, via Harvard Law School Forum on Corporate Governance and Financial Regulation)
[Guidance Overview] IRS Explains New $1M Compensation Deduction Rule
"There are a number of actions companies subject to Section 162(m) should be taking at this time: [1] Prepare a list of current covered employees and continue to monitor who is a covered employee ... [2] Carefully review and inventory all written compensation plans and agreements -- including nonqualified plans -- and determine which may qualify for grandfathered status. [3] For grandfathered agreements, determine the extent to which amounts are grandfathered ... [4] Consider structuring new agreements to make payments through annuities or installments spread over multiple years on a post-retirement basis to allow efficient utilization of the $1 million exemption." (Buck)
Don't Miss an Opportunity to Optimize Retirement Within Your LTI Program
"[C]ompanies would be well-served to audit the retirement features of their [long-term incentive (LTI)] programs to determine: [1] Whether there is a meaningful difference in equity treatment for retiring versus non-retiring employees, and the impact on employees' total compensation for the year of retirement; and [2] What the cost would be for providing more favorable equity treatment to retiring versus non-retiring employees, resulting in less forfeitures." (Meridian Compensation Partners, LLC)
Success Factors for Small Employer Non-Qualified Plans (PDF)
"Fancy, complicated designs that involve multiple in-service distributions, a variety of choices for deferral or distribution elections, and complex crediting sound great, but are often misunderstood and ultimately work against the plan and its participants.... In the tax-exempt world the pure non-qualified options are 457(b) or (f) plans.... For some small employers, plan document sticker shock can also come into play." (Gallagher)
Change-in-Control Benefits Can Incentivize Valuable Transactions, Protect Executives
"These benefits should meet key design objectives, pass an external test of fairness, and avoid windfalls upon executive departures. Directors should consider the following concepts when designing CIC severance protections for executives.... [1] Participation.... [2] Benefit levels.... [3] Excise tax.... [4] Other retention tools." (Meridian Compensation Partners, LLC)
ISS Issues FAQs on New Global Industry Classification Standard (GICS) Code 5020
"The first FAQ discusses how GICS Code 5020 will affect the evaluation of equity compensation plans under ISS's US Equity Plan Scorecard. ISS will immediately establish new burn rate thresholds for the companies in GICS Code 5020 ... The first FAQ explains how ISS burn rates of other GICS Codes will be affected, as well.... [T]he FAQs are high-level guidance and are not a guarantee of how ISS's Global Research Department will apply its benchmark policy in any particular situation." (Thomson Reuters Practical Law)
Year 2 CEO Pay Ratio Decisions May Be Complicated
"Some organizations will be surprised to discover that, despite population changes (including those from acquisitions or divestitures), they will be permitted to use the same median employee in Year 2. Other organizations may discover that using the same median employee in Year 2 may yield a different pay ratio, while still others may be compelled by their circumstances to identify a new median employee." (Willis Towers Watson)
Will Incentive Plans Reflect Strong Performance in 2018?
"On the surface, the robust financial performance would suggest strong incentive plan payouts.... Most incentive plan goals account for more than year-over-year performance, i.e., they flex up and down along with rising and declining expectations. That's one reason we typically find incentive plan payouts following a bell-shape distribution curve." (Willis Towers Watson)
Key Tax Planning Strategies for Executives Receiving Stock-Based Compensation
"For those technology executives who derive a significant amount of income from stock-based compensation, a variety of planning opportunities are available -- such as estate planning, change in residency, and charitable giving. Regardless of which avenues are pursued, early planning is instrumental in helping executives get the most value from their options." (Moss Adams LLP)
Under New IRS Section 162(m) Guidance, Many Common Arrangements Will Lose Grandfathered Status
"[Notice 2018‑68] provides a number of examples of its interpretations of the amended Code Section 162(m) that are not always intuitive.... In addition, there are a number of areas that still require future guidance, including what modifications will be permitted with respect to deferred compensation plans that require a payment delay until such payment will be fully deductible by the company, as permitted under Section 409A of the Code." (Dorsey & Whitney LLP)
Helping Organizations Define Optimal Executive Benefits Opportunities
"[E]mployers and employees clearly see NQDC plans as a significant component in corporate and individual success and stability: 3 percent of survey participants indicated that the most common reason employers offer an NQDC plan is to 'have a competitive benefits package' and 23.4 percent believe the reason is to help 'eligible employees accumulate assets.' 50 percent of all employers surveyed allow both employer and employee contributions to NQDC plans. And, nearly 60 percent of plans set money aside to fund benefits." (Fulcrum Partners LLC)
Compensation Designs and Strategies That May Help Limit the Impact of Section 162(m)
"[1] Scrutinize the Executive Order (EO) setting and Named Executive Officer (NEO) selecting processes; [2] Non-qualified deferred compensation or SERP plans; [3] Coordinated non-qualified plan distributions; [4] Automatic or voluntary deferral of RSUs or annual bonus; [5] Qualified Plan SERP-switch; [6] Code Sec. 409A allowed deferral; [7] Coordinated non-qualified option exercises; [8] Incentive stock options; [9] New Code Sec. 199A." (Winston & Strawn LLP)
Section 162(m) Guidance Clarifies Executive Comp Limitations, with Caution to Corporations
"[It] is unclear whether compensation arrangements that allow company boards to decrease performance-based pay (negative discretion compensation) are still subject to the $1 million cap.... [S]ome boards may look to decrease performance-based compensation as part of their overall executive pay package.... [C]ompanies may seek to decrease bonuses and increase salaries, since deductibility no longer differentiates between the two." (Olshan)
[Guidance Overview] IRS Issues Guidance on Changes to Section 162(m)
"The Notice has generated confusion about the impact of 'negative discretion' on the grandfather rule. It is not unusual for a performance incentive plan to state that awards will be paid to participants upon the occurrence of stated corporate performance metrics, subject to the company's discretion to reduce such amounts. [The authors'] view is generally that negative discretion should not prevent the grandfather from applying unless the discretion is so broad as to render the promise illusory and the purported contract unenforceable. The question comes down to state contract law (or federal common law, in the case of nonqualified pension plans like SERPs)." (Morgan Lewis)
[Guidance Overview] New IRS Guidance on Section 162(m)'s Deduction Limitation for Executive Comp
"[T]he IRS requested comment on how to apply the definition of 'publicly held corporation' to foreign private issuers; whether an employee who was a covered employee of a predecessor of the employer constitutes a covered employee; how Section 162(m) applies to companies immediately after they go public through an initial public offering (or similar transaction); and how to determine the three most highly compensated officers for a taxable year that does not end on the same date as the last completed fiscal year." (Cadwalader, Wickersham & Taft LLP)
Questions to Ask About Your Performance Share Grant
"[1] What are the performance goals and metrics as stated in your company's plan? ... [2] What is the performance period during which the goal must be reached? ... [3] Is there a sliding scale for share payout? ... [4] What would happen to your performance share grant if you were to lose your job, retire, become disabled, or die? ... [5] Is there an election to defer the delivery of the shares (and the taxes) beyond the normal time of share payout? ... [6] What happens to my performance share grant if my company is acquired?" (
Growth in CEO Pay Since 1990 (PDF)
"For the period 1990 through 2016 median CEO pay grew by over 400 percent. If annualized CEO pay growth thus far in the current decade continues for the rest of the decade, the end-of-decade median CEO pay level will have increased by more than 500 percent over the median CEO pay in 1990." (McCarter & English)
Common Benefit Pitfalls for Closely-Held Businesses, Part 4: Perks
"[M]ost closely-held and family-owned businesses maintain a litany of perks adopted to enhance the package made available to those 'key' groups. We commonly think of club memberships, company cars and private jet excursions, to name a few.... [T]hese perks don't come without the need for careful vetting of certain tax and compliance considerations:" (Michael Best)
[Guidance Overview] Initial IRS Section 162(m) Guidance Makes Company Decisions Possible
"[In] many cases, the guidance offers sufficient details to help companies decide what is and is not tax-deductible in future years for current covered employees. A review of the precise details underlying compensation grants will be required, including a close reading of plan documents and grant agreements." (Willis Towers Watson)
An Overview of ISS' Equity Plan Scorecard (EPSC) Model (PDF)
9 pages. "If you are considering taking a request to shareholders for the approval of shares for an equity compensation plan and a significant number of your shareholders are influenced by the Institutional Shareholder Services (ISS) vote recommendations, you should understand how ISS evaluates equity plan proposals. This document provides an overview of ISS' EPSC model which ISS uses to evaluate equity compensation plan proposals" (ExeQuity)
Non-Qualified Retirement Plans & Divorce: You May Honor DROs, But Should You?
"[M]any nonqualified plans will include an anti-assignment clause that prohibits the plan participant from assigning his or her benefits to anyone else. If your plan includes this language without an exception for DROs, then you generally could not honor a DRO unless you first amended the plan.... [H]onoring a DRO that requires an immediate lump sum payment could require large cash outlays under the plan sooner than expected." (Foley & Lardner LLP)
[Guidance Overview] New York Tax Update: New Rules for Non-Qualified Deferred Compensation (PDF)
"The [New York State and New York City] tax departments did not lose sight of Section 457A in the blitz of 2017's federal tax reform, and each published statements that concern deferred compensation. In both cases, the tax departments have advised that all of it must be recognized as business income -- eligible to be taxed as such, subject to statutory methods for attributing that income to the State and City." (Mayer Brown)
[Guidance Overview] IRS Breaks Its Silence on 162(m) Grandfathering Rule but You Might Not Like What It Has to Say
"Many performance-based plans provide companies with the ability to reduce amounts payable under those plans based on subjective factors. For example, if a company has the discretion to reduce a $1 million bonus to $200,000 based on subjective factors, only $200,000 is payable pursuant to a written binding contract and the remaining amount is not eligible for grandfathered status." (Drinker Biddle)
Stock Compensation: 2018 Assumption and Disclosure Study (PDF)
"When valuing stock options, companies continue to rely heavily on the Black-Scholes option pricing model, with 77% of Large companies relying solely on the use of that model in valuing their stock option awards. However, 23% of Large companies disclose use of other models ... Overall, median Black-Scholes option pricing model assumptions for High Tech companies moved similarly to those of the Large company group, from 2016 to 2017." (PwC)
Executive Comp and Benefits Issues for Start-ups and Emerging Companies (PDF)
32 pages. "In contrast with the typically passive nature of public company shareholders, principal shareholders of start-ups ... are often directly involved in establishing the company's executive compensation packages. The result is typically a close alignment of the executives' compensation with the interests of the shareholders (and later the investors).... Executive compensation in the emerging enterprise tends not to be lavish or mysterious, although the compensation can be substantial if the company is successful." (Skadden via Bloomberg Law)
[Guidance Overview] SEC Weighs 'Modernizing' Rule 701(e) as It Raises Disclosure Threshold for Private Companies Granting Equity
"The required change increases the equity value threshold (measured annually) from $5 million to $10 million. This benefits private companies which would have to provide additional disclosure requirements for the offer and sale of securities granted to their employees once the threshold is surpassed." (Willis Towers Watson)
[Guidance Overview] Guidance on Section 162(m) Modifications: A Not So Benevolent Grandfather and Details About Covered Employees Are Uncovered
"Companies subject to Section 162(m) should consider several action items in light of the guidance: [1] Regularly update (or start keeping) a list of covered employees, which will be needed for future years. [2] Inventory and analyze existing contracts (including plan documents and employment agreements) to determine whether and to what extent payments thereunder can come within the Grandfather Rule.... [3] Determine whether and to what extent preserving deductions is a priority to the company, and whether it makes sense to preserve any grandfathering that may be available given any associated uncertainty and complexity." (Mayer Brown)
Recognize and Motivate Key Employees Using a Nonqualified Incentive Bonus Plan (PDF)
12 pages. "What can employers do to help ensure that top talent remains committed to the organization and not to their competition? ... [C]onsider enhancing the benefits package with a Nonqualified Incentive Bonus Plan. This type of plan is designed to: [1] Encourage the best employees to join an organization as the organization grows. [2] Keep key employees satisfied and motivated for the long term. [3] Reward top talent for reaching goals." (Fulcrum Partners LLC)
Boards Focus on Search for Meaningful Compensation Limits
"Total pay for non-employee directors continues to grow at a modest but steady rate, driven by increases to the annual cash retainer and the value of annual equity grants.... Annual compensation for directors continues to be a hot topic for shareholders and boards alike, precipitated by the ongoing attention to shareholder lawsuits that allege 'excessive' pay for board members. This mutual interest has prompted boards to look for ways to mitigate exposure to lawsuits involving director pay programs; the most visible result is the swift action taken in adopting annual compensation limits specific to directors." (Willis Towers Watson)
[Guidance Overview] IRS Issues Partial Guidance on Repeal of Performance-Based Exception in Section 162(m)
"[Notice 2018‑68] offers a question that concludes that if a plan permits amendments at any time that eliminate future earning credits, only the account balance credited as of November 2, 2017 is grandfathered. Any later earnings on these amounts are not grandfathered, unless that right to earnings is expressly reserved. But this cannot be the correct conclusion." (Pillsbury Winthrop Shaw Pittman LLP)
[Guidance Overview] IRS Provides Guidance on Grandfathered Arrangements Under New Code Section 162(m) Rules
"Companies should be aware that an increase in an executive's base pay may impact potentially grandfathered amounts, for example severance benefits that are based on the executive's base pay.... [A] deferral of the payment timing of a grandfathered amount is considered a material modification, unless any additional amount that will be paid at a later date as a result of the deferral is based on either a reasonable rate of interest or a predetermined actual investment." (Mazursky Constantine LLC)
[Guidance Overview] IRS Issues Guidance on Section 162(m) Amendments (PDF)
"The most significant impact of the IRS Notice is that payments under the great majority of 162(m) 'umbrella' plans will not qualify for grandfathered deductibility under the TCJA.... [If] the company reserves the right to exercise negative discretion to reduce payments (which is a standard feature of 162(m) 'umbrella' plans), then the IRS Notice treats payments under the program as non-obligatory. Unless a portion of the payments under such a plan are mandated as a floor amount (which is rarely the case), the plan will not qualify for grandfathered deductibility." (ExeQuity)
Small Caps Most Likely to Face Negative Say-on-Pay Result
"So far this year, 22 non-S&P 1500 companies have lost a say-on-pay vote, compared with 13 same-size companies in 2017. The number of S&P SmallCap 600 companies that have lost a say-on-pay vote has also risen from seven in 2017 to 11 in 2018 so far." (Corporate Secretary)
[Guidance Overview] FASB Issues Accounting Standards Update on Accounting for Stock Compensation to Nonemployees (PDF)
"Previously, Topic 718 applied only to stock compensation granted to employees ... Stock compensation granted to nonemployees was subject to vesting date, ... fair value principles that required companies to remeasure fair value at each reporting period until settlement for equity-classified awards. The expansion of Topic 718 to include nonemployees ... will simplify accounting by making most equity-classified awards subject to fixed grant date fair value principles, thereby eliminating the variable mark-to-market accounting." (FW Cook)
[Guidance Overview] IRS Issues Guidance on Code Section 162(m) Including Grandfathered Arrangements and Covered Employees
"Stock option awards that vest based on continued service granted before the grandfathered date that otherwise qualified as performance-based compensation under the pre-act Section 162(m) rules typically will continue to be treated as performance-based compensation ... Many performance-based restricted stock unit awards granted before the grandfathered date that otherwise qualified as performance-based compensation under the pre-act Section 162(m) rules will not be grandfathered ... Many bonus plans in effect as of the grandfathered date under which the payments would have qualified as performance-based compensation pursuant to the pre-act Section 162(m) rules also will not be grandfathered[.]" (Wilson Sonsini Goodrich & Rosati)
[Guidance Overview] Time to Review Executive Compensation Arrangements in Light of IRS Guidance on Section 162(m)
"[P]ublic companies should: [1] Identify and track covered employees.... [2] Discern if a single compensation agreement includes compensation elements that are eligible for grandfather treatment and others that are not.... [3] Analyze whether pre-existing arrangements constitute written binding contracts.... [4] Analyze CFO compensation-related agreements.... [5] Pause before amending executive compensation agreements.... [6] Watch for additional IRS guidance." (Womble Bond Dickinson)
SEC Targets Perqs in Another Enforcement Action
"[T]he SEC stated [that The Dow Chemical Company] incorrectly applied a standard whereby a business purpose related to the executive's job was sufficient to determine that a benefit would not be a perquisite that required disclosure. As a result, the issuer did not disclose personal use of corporate aircraft and other expenses." (
SEC to Explore Proxy Process in Roundtable, as Treasury Provides 162(m) Tax Guidance
"As companies prepare the 2019 proxy, which will include the second official pay ratio disclosure, newly-issued IRS guidance on the tax deductibility of executive compensation promises to add an unexpected discussion point. Meanwhile, intense political focus on share buybacks as well as an upcoming SEC Roundtable on the proxy process, which is likely to focus on proxy advisory firms, could also have an impact on the executive compensation landscape." (HR Policy Association)
[Guidance Overview] IRS Issues New, Mostly Unfavorable Section 162(m) Guidance
"Many existing arrangements with so-called negative discretion are not grandfathered ... Compensation contracts that are renewed or extended are not grandfathered ... Increases in compensation are deemed material modifications ... Changes to employment agreements with covered employees should be carefully reviewed ... to consider the impact of Section 162(m) on such arrangements." (DLA Piper)
Tax Cuts and Jobs Act of 2017: Impact on Executive Pay of Tax-Exempt Organizations (PDF)
"[1] [Consider] change to vesting schedules of Code Section 457(f) deferred compensation to incorporate graduated vesting instead of cliff vesting ... [2] Review fringe benefit offerings and ensure that they are structured ... to be excludable from gross income; [3] Evaluate whether the tax-exempt organization's controlled group can consolidate its employment and hence payrolls into a single entity to minimize future additions to the covered employees group; ... [4] [T]rack and support the portion of a physician's compensation that is 'directly' related to performing medical services." (McDermott Will & Emery LLP, via Thomson Reuters Journal of Compensation and Benefits)
Strategies for Creating More Deductible Compensation Under the 'New' Section 162(m)
"Two different sections of the regulations under Code Sec. 409A provide an exception to the prohibition on delaying or deferring payments and allow a company to decide to defer the payment of compensation to an executive, without an election in advance, if the compensation is not deductible under Code Sec. 162(m). ... The new 'once a covered employee, always a covered employee' rule will complicate some companies' ability to utilize these exceptions, but should not eliminate them." (Winston & Strawn LLP)
[Guidance Overview] Initial Post-Tax Reform 162(m) Guidance: A Reasonable Grandfather and a Covered Employee Surprise
"The definition of covered employees (the group for whom compensation deductions are capped at $1 million) has always been closely tied to the group of named executive officers who are reported in the proxy under SEC rules. Notice 2018-68 partly changes this.... On its face, the newly added language seems to provide for applying the SEC proxy rules when they otherwise would not apply -- but still applying the SEC rules. Notice 2018-68 goes further, however, and interprets this newly added language to disregard the SEC rules." (Kilpatrick Townsend)
[Guidance Overview] IRS Releases New Guidance on Section 162(m) Covered Employees and Grandfathering Rules
"[Notice 2018-68] clarifies that, for purposes of identifying a corporation's covered employees under Section 162(m), it is not relevant whether the SEC scaled disclosure rules for smaller reporting companies and emerging growth companies apply to the corporation. This may lead to some disconnects between which officers a company reports as its 'named executive officers' for a given year in its proxy statements and which officers are 'covered employees' for Section 162(m) purposes for that same year.... There may be additional disconnects where a public company's taxable year does not end on the same date as its fiscal year for SEC reporting purposes -- for example, in the case of a merger or acquisition." (McGuireWoods)
[Guidance Overview] Guidance on Section 162(m) 'Grandfather' Rules: IRS Torpedoes Negative Discretion Terms in Plans
"This conclusion penalizes taxpayers for utilizing negative discretion in performance-based plans, which is viewed as a best practice in designing compensation plans.... What is particularly punitive about the IRS position is that ... most plans provide that the compensation committee has unlimited negative discretion to reduce performance-based awards. There is no minimum bonus that is guaranteed and not subject to reduction. In arrangements such as these, any bonus paid will not be grandfathered because the plan creates no written binding contract." (Wilkins Finston Friedman Law Group LLP)
[Guidance Overview] IRS Issues Guidance on Section 162(m), as Amended by the 2017 Tax Act
"[If] negative discretion language exists in plan documents that govern compensation payments, the underlying compensation grants would be eligible for the Grandfather Rule only if taxpayers could affirmatively demonstrate that a court would not uphold the negative discretion language and that, in effect, the compensation committee has no authority under state law to reduce the compensation payable once the performance goals are met. Traditional 'bad act' or claw-back provisions presumably do not affect the Grandfather Rule." (EY)
[Guidance Overview] IRS Notice Provides Initial 162(m) Guidance, Narrows Grandfathering Provision
"[Notice 2018-68] provides examples in which the corporation retains a right to terminate or amend contribution or accrual of payments on a go-forward basis and clarifies that a portion of the total future payments may be considered binding under applicable law as of November 2, 2017 (e.g., the non-forfeitable amount accrued as of that date) and therefore only a portion of the total payments may be considered grandfathered while the remainder is not." (KPMG)
[Guidance Overview] IRS Issues Key Guidance on Amended Code Section 162(m)
"Public companies must now carefully track any and all covered employees and those employees (and former employees) who may be determined to be covered employees at the end of the year, even if their employment terminates midyear, maintain a clear historical record, and retain that information until all payments of applicable remuneration have been made to the employee and his or her beneficiaries post-termination." (Winston & Strawn LLP)
[Guidance Overview] IRS Issues Long-Awaited Initial Guidance under Section 162(m)
"[T]he TCJA changes to Section 162(m) will apply to an employment agreement that is renewed after November 2, 2017, due to action or non-action by the covered entity. On the other hand, an employment agreement will not be treated as renewed due to the action or non-action of the employee to keep the covered entity bound to the contract beyond a certain date at the employee's sole discretion." (McDermott Will & Emery)
[Guidance Overview] IRS Provides New Rules under Stricter $1 Million Tax Deduction Limit for Executive Compensation
"Prior to the December 2017 legislative changes, the IRS had issued guidance indicating that the deduction limitations of Section 162(m) did not apply to compensation deductible in an acquired public company's short pre-acquisition year where, as was typically the case, SEC rules did not require executive compensation disclosure for that fiscal year. The Notice no longer accommodates that helpful relief." (Ropes & Gray LLP)
Some of the Twists and Turns of the 162(m) Grandfathering Rules
"The grandfathering protection for legally binding plans and agreements only applies until such contracts are materially modified. The Notice provides several examples of material modifications, including: [1] The automatic renewal of a grandfathered employment agreement that provides for automatic renewal unless either party gives notice to the other before a specified date.... [2] A substantial increase in the base salary amount specified under a grandfathered employment agreement, e.g., an increase in excess of normal 'cost-of-living adjustments.' " (Winston & Strawn LLP)
IRS Issues Anticipated Guidance on Covered Employees and Grandfathering Rules Under Code Section 162(m)
"Companies should ... review the terms of their existing incentive compensation plans and arrangements and discuss the extent to which they may be grandfathered as well as how to avoid inadvertent material modifications that could jeopardize the deductibility of compensation paid to covered employees for current and future taxable years. Companies should also develop a protocol for keeping track of covered employees going forward." (Skadden)
[Guidance Overview] IRS Clarifies Grandfather Rule and Other Code Section 162(m) Issues
"[Notice 2018-68] indicates that compensation will not be considered payable under a written binding contract if the employer is not obligated to pay it under applicable law. Thus, it appears that plans that provide the employer with discretion to reduce or eliminate an employee's compensation (i.e., negative discretion) will fail to satisfy the 'written binding contract' standard to the extent the compensation can be reduced or eliminated." (Groom Law Group)
[Guidance Overview] New IRS Guidance Regarding Expanded 162(m) Rules
"Companies subject to the deduction limitation should act now: [1] to confirm that the list of individuals that they have identified as subject to the deduction limitation comply with this methodology, [2] to determine what portion, if any, of current compensation arrangements would be able to be grandfathered, and [3] consider methods to maximize the deductibility of current and future compensation." (Vorys)
[Guidance Overview] More Details on the IRS Guidance on the 162(m) Grandfathering Rules
"One thing the guidance does make absolutely clear is that the first step in determining whether any payment to any person in any year after 2017 is subject to the draconian limits of Section 162(m) is to determine whether there was a written binding contract in effect on November 2, 2017, which created a legal obligation on the company under any applicable law (e.g., state contract law) to pay the compensation under such contract if the employee performs services or satisfies the applicable vesting conditions. Every one of the many examples provided in the guidance begins with a determination of whether the plan or agreement created a legal obligation on the company. In the examples, some do and some do not." (Winston & Strawn LLP)
[Guidance Overview] IRS Issues Initial Guidance on the Application of Section 162(m) After Tax Reform
"[T]he existence of a written binding contract on November 2, 2017, is not by itself sufficient to qualify the arrangement for the transition rule. The Notice clarifies that: Compensation is payable under a written binding contract that was in effect on November 2, 2017 only if the corporation is obligated under applicable law to pay the compensation under the contract if the employee performs services or satisfies vesting conditions.... The Section 162(m) amendments apply to a written binding contract that is renewed after November 2, 2017. [Notice 2018-68] provides guidance on specific contractual terms that would result in a contract renewal and when a material modification would occur." (Thomson Reuters Practical Law)
[Guidance Overview] IRS Issues Critical 162(m) Grandfathering Rules
"Notice 2018-68 provides guidance on: [1] What constitutes a written binding contract in effect on November 2, 2017 (hint, it may require a legal judgment). [2] What constitutes a material modification of a written binding contract. [3] The types of remuneration that may remain deductible (protected from the new rules under the grandfather exception). [4] The extent to which certain individuals employed in 2017 and the future will become and remain covered employees subject to the deductibility limit." (Winston & Strawn LLP)
[Official Guidance] Text of IRS Notice 2018-68: Guidance on Section 162(m) as Amended by the Tax Cuts and Job Act (PDF)
"Section 162(m)(1) generally limits the allowable deduction for a taxable year for remuneration by any publicly held corporation paid with respect to a covered employee. The [Tax Cut and Jobs Act of 2017] made significant amendments to Section 162(m), and provided a transition rule applicable to certain outstanding arrangements (commonly referred to as the grandfather rule). Stakeholders have submitted comments indicating that they would benefit from initial guidance ... on the amended rules for identifying covered employees and the operation of the grandfather rule, including when a contract will be considered materially modified so that it is no longer grandfathered. This notice addresses these limited issues. The Department of the Treasury and the [IRS] anticipate that further guidance ... will be issued in the form of proposed regulations[.]" (Internal Revenue Service [IRS])
What Does the CEO Pay Ratio Data Say About Pay? (PDF)
"Our analysis finds company size as measured by employee count is the primary driver of the CEO Pay Ratio; company revenue and market capitalization are secondary drivers. Deeper analysis uncovers industry trends that may provide companies additional context as they compare their CEO Pay Ratios to those of their peers. Ultimately, despite some interesting trends uncovered, analysis of the CEO Pay Ratio data provides little actionable intelligence for companies and questionable, if any, value for investors. More concerning, we find potential avenues for critics of executive pay to manipulate the data to serve their interests or constituencies." (ExeQuity)
Ninth Circuit Withdraws Altera Decision, Leaving the Tax Court Decision in Force for Now
"[T]he Tax Court [had] invalidated [Treas. Reg. 1.482-7A(d)(2)] which provides that in the context of qualified cost-sharing agreements the cost of employee stock compensation must be treated as a per se expense allocated between related parties.... On July 24, 2018, the Ninth Circuit by a vote of 2-1 reversed the Tax Court's [decision] ... Prior to the release of the opinion, one of the two judges who voted to reverse the Tax Court died.... The decision to withdraw the case ... was done by the Court and appears to be an admission by the Court that they made a mistake in allowing Judge Reinhardt's vote to be cast after he passed." [Altera Corp. v. Comm'r, Nos. 16-70496, 16-70497 (9th Cir. Aug. 7, 2018)] (EisnerAmper)
CEO Compensation Surged in 2017
"The first measure includes stock options realized (in addition to salary, bonuses, restricted stock grants, and long-term incentive payouts). By this measure, in 2017 the average CEO of the 350 largest firms in the U.S. received $18.9 million in compensation, a 17.6 percent increase over 2016.... The 2017 CEO-to-worker compensation ratio of 312-to-1 was far greater than the 20-to-1 ratio in 1965 and more than five times greater than the 58-to-1 ratio in 1989 ... [The authors also track] the value of stock options at the time they are granted. By this measure, CEO compensation rose to $13.3 million in 2017, up from $13.0 million in 2016." (Economic Policy Institute)
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