HR Finance Alert

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Despite new restrictions in the recently passed congressional bailout bill, compensation committees will not need to overhaul their core pay-for-performance programs. However, as the law might be expanded to cover all companies, they should assess and reconsider the necessity of their existing severance and change-in-control provisions in light of other compensation elements.

Under section 162(m) of the IRS tax code the $1 million deduction limit for the top five executives in a company will be lowered to $500,000 and will include annual bonuses, cash LTI, performance stock and stock options. Also, companies with sizeable deferred compensation obligations will now have the option to either stretch their payments over several years (keeping their annual payments below $1 million) or forgo a tax deduction for a large portion of a lump sum paid. Lastly, under the new rule, paying an executive $1.5 million in one year would leave the company with $1 million in nondeductible compensation for that year. For option gains, the deduction would be applied over the vesting period.