The NASPP Blog

This week, we feature another installment in our series of guest blog entries by NASPP Conference speakers.  Today’s entry is written by Ellie Kehmeier of Steele Consulting, who will lead a session on Section 162(m) at the NASPP Conference.

Section 162(m): Keeping Your Executive Compensation Deductions Safe from the Tax Man
By Ellie Kehmeier of Steele Consulting, with contributions from Danielle Benderly of Perkins Coie and Art Meyers of Choate Hall & Stewart

If any code section warrants the old adage “the devil is in the details,” it’s got to be Section 162(m), which disallows corporate tax deductions for compensation paid to top executives in excess of $1 million. Complying with the requirements of this section can be devilishly tricky, especially when it comes to trying to preserve tax deductions for equity awards by meeting the exception for performance-based compensation.

My fellow panelists, Danielle Benderly of Perkins Coie and Art Meyers of Choate Hall & Stewart, and I have presented on 162(m) before. We realize that, while it’s an incredibly important topic, it can also be an incredibly dry topic. For our session in New Orleans, we plan to bring 162(m) to life with lively back-and-forth discussion of issues raised in a detailed case study we’re putting together for this session that hits on many of the stumbling blocks that we’ve seen trip up HR, legal, and tax professionals alike.

For example, while most people understand that stock options and SARs generally qualify as performance-based compensation as long as the awards aren’t granted with a discounted exercise price, it’s easy to overlook the additional requirement that the compensation committee that grants equity awards to 162(m) covered employees must be comprised solely of two or more “outside directors”. Easy enough, you might think: if we’re already following the NASDAQ and NYSE listing requirements for independent directors, we should be okay, right? Not so fast! The tax rules are different, and in some respects more stringent, than the exchange listing requirements. For example, if your company pays any amount, no matter how immaterial, to an entity that is more than 50% owned by a director (directly or beneficially)–such as a caterer or florist that happens to be owned by a family member of that director–then you have a problem! If your compensation committee fails to meet these requirements, then all the equity awards granted by the committee similarly fail. That’s a harsh result, and can cause a pretty big hit to your company’s bottom line!

We will also use our case study to explore other outside director challenges, as well as tricks and traps related to when performance goals need to be established, if and how they can be changed, and when and how to get shareholder approval. For example, do your plans explicitly address how your compensation committee can adjust performance goals to reflect the effect on an acquisition? Can your company pay bonuses outside of your performance plan if the established goals are not met? Can you structure compensation for executives hired mid-year to comply with 162(m)? Our case study will also address the transition rules for newly public companies. Finally, we’ll discuss planning opportunities and best practices, and cover recent developments, including proposed 162(m) regulations that may be finalized by the time we meet in New Orleans. We’ll see you there!

Don’t miss Ellie, Danielle, and Art’s session, “Section 162(m): Keeping Your Executive Compensation Deductions Safe from the Tax Man,” at the 20th Annual NASPP Conference.