In order to remain competitive for executive talent, private companies have mimicked the compensation programs of public companies. Prior to the enactment of TCJA, companies could deduct compensation expense in excess of $1,000,000 paid to an executive, as long as the excess dollars were tied to one or more performance criteria (IRC Section 162(m)). The new law removes this deduction in the coming tax years.
While we don’t see any rush to eliminate these programs by any company (private or public), we expect mid-sized private companies, in particular, will be more fiscally ham-strung by this regulation than public companies or large private companies. This is because the new tax rate (21%) may not provide a sufficient decrease in corporate taxes to mitigate the loss of the compensation deduction. By 2020, we expect these companies will work the financial statement impact between the new and old tax rates and the absence of the deduction feature, and make hard choices as to the make-up of their executive compensation structure and value prospect.