Executive Comp and the new Administration

In the current state of lack of clarity as to where proposed deregulation by the new US administration may lead us, certain significant current aspects of executive compensation practices typical of larger enterprises may be subject to radical change.  Such changes can cause massive revisions to what are currently the standard models used in such circumstances.

These are complex areas but executives (and boards) should be alert to the following:

One million dollar rule: Public corporations cannot deduct CEO/highest paid employee pay if it exceeds $1M unless that pay is keyed to specific performance metrics.  If the corporate rate drops to 15% as proposed, there is less incentive for the company to limit fixed compensation.  Also, non-qualified stock options and performance based stock, exempt from the $1M rule, will become less attractive.

Incentive stock options: ISOs have fallen in favor as they deny a corporate deduction and the AMT reduces the tax advantages to employees.  The administration wants to repeal the AMT, which may help rejuvenate ISOs.

Deferred comp: Nothing is so confusing in the executive comp area as rules relating to deferred compensation under Section 409A (to defer tax on income until actually paid, close adherence to the controls in this Section must be observed).  Although Pearl Meyer (well-regarded executive comp consulting firm) states that the new administration has yet to address 409A, they also note that recent legislation has been proposed to alter or even reverse the practice under 409A, thereby upsetting many years of meticulous deferral planning.

SEC disclosure rules: No doubt these are under administration attack, but some are so entrenched in business practice that repeal today will not much matter.  I have posted re the pay ratio rule that is under clear seige even before its effective date, but existing rules requiring advisory say-on-pay stockholder votes and committee independence have lives of their own.  Say-on-pay may have the unintended company benefit of being the canary in the coal mine– better to learn of shareholder unrest, in this day and age, by means of a non-binding straw poll than to learn of it from a proxy fight or activist attack.

Leave a Reply

Your email address will not be published. Required fields are marked *