Banking & Finance Law Report

Tag Archives: Executive Compensation

For public companies, the time to update executive compensation practices is now: Final regulations issued under IRC Section 162(m) and American Rescue Plan Act further expands class of covered employees

At long last, the Department of the Treasury and Internal Revenue Service published final regulations to explain how changes to Internal Revenue Code Section 162(m) under the Tax Cuts and Jobs Act of 2017 (TCJA) affect the deductibility (or lack thereof) of compensation in excess of $1 million paid to covered employees. ¬†For the most part, the final regulations did not change any prior guidance.…

Final IRS Regulations Issued on Restricted Stock Grants

Restricted stock grants have been a popular executive compensation component for over a decade now. With a restricted stock grant, the employer gives shares of stock to the employee, but subject to two main conditions. One condition is a vesting condition, which generally requires the employee to remain continuously employed with the employer for a period of years, satisfy performance targets, or both. If the employee fails to satisfy the vesting requirements, the employee forfeits the stock. The other condition is that during the vesting period, the employee is prohibited from selling or otherwise transferring the stock.

Restricted stock is popular because it provides a link between the performance of the company and the compensation of the employee. At the same time, unless a complete disaster occurs, the employee generally is guaranteed of receiving some payment because the compensation is equal to the value of the stock, rather than only the appreciation in the value of the stock. In a turbulent economy, that protection is valued by employees.

With any executive compensation arrangement, however, it is important to consult the tax rules. Generally, the value of the stock to the employee who receives a restricted stock grant is not taxed …

Nonqualified Deferred Compensation Incentives for Bank Executives

In this post, we share a few thoughts about recent developments and trends regarding nonqualified deferred compensation incentives for key bank employees. Banks are seeking ways to attract and retain talent, while ensuring that compensation arrangements are aligned with newer statutory guidance, such as the Dodd-Frank Act and Section 409A of the Internal Revenue Code (the “Code”).

409A Penalties

Code Section 409A added new rules for “nonqualified deferred compensation.” Even if an executive compensation arrangement such as an employment agreement, severance agreement, change in control agreement, or equity compensation plan does not provide “nonqualified deferred compensation,” the arrangement may be required to follow strict deferral election and payment timing rules under Section 409A.

Executives are at risk of early income inclusion, a 20% penalty tax, and interest charges if their compensation arrangements violate the evolving 409A guidance. So the first question is whether the IRS is enforcing the potentially harsh penalties, even as to parties who have made a good faith compliance effort while guidance has evolved. In a word, yes. …

Public Companies May Need to Amend Stock Option Plans Soon to Qualify for Exception to $1 Million Compensation Deduction Limit

Publicly traded companies may need to act quickly to review, and, if necessary, amend their stock option and stock appreciation right ("SAR") plans in order to preserve tax deductions for compensation in excess of $1 million paid to certain executives. The reason for this review is that the Internal Revenue Service (the "IRS") and the United States Treasury Department recently issued proposed regulations that clarify a few items with respect to the application of Section 162(m) of the Internal Revenue Code (the "Code") to such plans. One item relates to requirements that stock options and SARs must meet to qualify as performance-based compensation. Another item relates to a transition rule for companies that initially are privately held but that later become publicly traded companies.

As background, Code Section 162(m) limits the deduction a publicly traded company may take with respect to remuneration paid to its "covered employees"— its CEO and 3 most highly paid officers (other than the CEO and CFO)—to the extent that such compensation exceeds $1 million. The deduction limit does not apply, however, to qualified performance-based compensation. Publicly traded companies often structure their stock options and SARs in a manner to qualify as performance-based compensation.…

Wall Street Reform Legislation Requires Public Companies to Revise Clawback Policies

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Although the Act focuses primarily on the financial industry, the Act contains a section that requires the Securities and Exchange Commission (“SEC”) to publish rules that direct the national securities exchanges and associations to prohibit the listing of any security of an issuer that does not develop and implement an appropriate clawback policy.

Specifically, a clawback policy must provide that an issuer that is required to restate its financial statements because of a material financial reporting violation must recover from certain executive officers the amount in excess of what would have been paid to them under the issuer’s restated financial statements. No showing of misconduct or negligence on the part of the affected executives is required. In other words, public companies must recover the excess, if any, between the actual pay-out under the original financial statements and the amount payable under the restated financial statements. This policy must apply to any current or former executive officer who received incentive-based compensation (including stock options) during the three-year period preceding the date on which the restatement is required. The Act also requires …

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