The Tax Cuts and Job Act of 2017 was recently signed into law creating two important changes in executive compensation, which we outline below.
The “intermediate sanctions” rules under Section 4958 of the Internal Revenue Code have long governed the payment of compensation to executives of public charities. While these rules are highly prescriptive, if followed, they offer taxpayers a significant advantage in the form or a rebuttable presumption of reasonableness. While there was concern among tax-exempts that the tax bill might reduce or even eliminate the presumption of reasonableness, that turned out not to be the case. But the final version of the legislation for the first time imposed a tax on certain excess compensation and excess parachute payments, which we discuss in more detail below.
From: Ned Help
To: Carrie Counselor
Date: June 16, 2016
Subject: Benefit and Compensation Considerations
Thank you again for all your help over the past few weeks as we address our concerns with employees going abroad. We previously talked about offer letters and employment agreements. I know you covered some of the basic considerations regarding benefits and compensation, but I was hoping we could go into this topic in a little more depth, as we look to implement revised standards internally.
We will be sending some high level employees abroad for assignments in key geographic regions for the business and I expect to get plenty of push back on compensation packages. I was hoping you could provide a quick overview of some key compensation considerations we should be aware of before we begin negotiations with these individuals.
It’s been over five years since the signing of the Dodd-Frank Wall Street Reform and Consumer Act (“Dodd-Frank”) and we are still waiting for the U.S. Securities and Exchange Commission to finalize rules on several provisions related to executive compensation. Below is a summary of the current landscape of Dodd-Frank as it relates to key executive compensation provisions. Over the coming months, we will be posting a series of blog posts addressing some of the nuances of these provisions. Stay tuned for more.
Our colleague, Pam Greene, wrote an excellent post on our sister blog, Securities Matters, on the SEC’s final rule requiring public companies to disclose the ratio of their CEO”s annual total compensation to that of the median annual total compensation of all company employees. You can read that post here.
Section 162(m) of the Internal Revenue Code precludes the deduction by public companies for compensation paid to certain covered employees in excess of $1,000,000 in any taxable year. This limitation on deduction does not apply to performance-based compensation. Such performance-based compensation is deductible so long as the following requirements are met:
Click here to watch our very own David Lagasse discuss potential pitfalls start-ups face when designing their compensation programs.