The recent changes to the tax laws, referred to as “The Tax Cuts and Jobs Act” (TCJA), have found a number of ways to offset the expected trillion and a half dollar deficit that it will cause. One of the largest changes affects publicly-traded companies, as well as some private “C corporations” and even some “S corporations”. IRS Section 162(m), which primarily affects public companies, previously had a limitation on the deductibility of executive compensation, with an exception (non-inclusion) for performance-based pay and stock programs. As of January 1, 2018, the performance requirement is terminated; this means that performance is no longer considered as an “exemption”.
For the last decade, most executive compensation has been designed to provide an exception under 162(m), which would be justified based on performance and therefore deductible as a business expense. This also makes shareholders and stock analysts much happier, since it infers that the awards are deserved and indicative that the company is doing well. It is anticipated that, over time, Compensation Committees will modify their incentive and stock plans, as well as the rationale for earning awards. They could eliminate the requirement that a large portion of the compensation would be tied to specific results; however, we question that they will revert to incentive plans being totally subjective; only time will tell.