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While opinions on the Tax Cuts and Jobs Act (the “Act”) vary, one thing everyone can agree on is that it is a game changer in many areas of law and business. An example of that is how the Act affects executive compensation arrangements of publicly traded companies.  The Act has amended Internal Revenue Code Section 162(m) so that if a public company pays more than $1 million in compensation to a “covered employee” in 2018 or later, that company generally will not be able to deduct the amount over $1 million.  Amounts paid under agreements that were effective on or before November 2, 2017, however, may still be able to be deductible under a transition rule (assuming that the agreements are not materially modified).  To manage the loss of this deduction, public companies should consider taking the following actions with respect to their executive compensation plans.

  • Reevaluate the design and administration of their plans.
  • Implement measures to track covered employees because once an executive is a covered employee under Code Section 162(m), that person remains a covered employee forever (including after termination of service and even after he or she is deceased).
  • Encourage covered employees to consider deferring larger amounts of compensation until termination of employment or later, when compensation may be less than $1 million.
  • Review their proxy statement disclosures and make any appropriate updates to reflect the changes that the Act made to Code Section 162(m).

    • This post will discuss these issues in greater detail below.

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