Tax deductibility of executive compensation

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This is an academic question, or rather a question pertaining to academic research. With a couple of colleagues I have started a project ascertaining the impact of Section 162(m) on compensation design, in particular we seek to exploit the "conflict" so to speak between section 162(m) and the 2006 proxy statement revisions that led to the CFO's compensation being excluded from the deductibility limitations. So if I might ask two questions from a practitioner perspective.

1. Is Section 162(m) a factor in compensation contract design?
2. If your answer to 1 is yes, did exclusion of CFOs from section 162(m)'s limitations impact the CFO specific compensation package - for example, because of this provision is there less reliance on performance-based compensation?

Thanks

Steve

1 Reply

Dan Walter

Wed Aug 19, 2015 at 11:14AM

Hi Steve,

I am not sure how I missed this question last month but here goes....

162(m) is absolutely a factor in the plan I design for nearly any executive group. It is fairly easy to be compliant with the rule and there is very little reason to miss out on the tax deduction.

The CFO component is interesting. Most companies still hold the CFO to the same, or very similar, performance standards as the rest of the NEOs. The biggest reason for this is that they all have a a fairly good idea of what each other makes and what they need to do to earn their compensation. If the CFO was fundamentally different it would require another layer of communication. Since the current layer of communication is already so thin, it seems unlikely that most companies would want to take on additional internal administration and communication complexity.

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Tax deductibility of executive compensation