Revising 162(m) Disclosures in Proxy Statements

Corporate & Securities Law Blog

The Section 162(m) deduction limit for performance-based compensation was repealed by the Tax Cut and Jobs Act, effective for taxable years beginning after December 31, 2017, subject to transition relief. Public companies should consider revising disclosures in their upcoming proxy statements. Recently filed proxy statements may provide some ideas, a sample of which is noted below.

The disclosures seem to range from “compensation in excess of $1,000,000 will no longer be tax deductible, get used to it” to “it may not be deductible, but we still intend to tie pay to performance.”

TD Ameritrade Holding Corporation

Certain compensation previously paid to executive officers under the MIP, and certain equity awards that previously vested, were and are intended to be fully deductible under the “performance-based” compensation exception (discussed below) previously provided by Section 162(m) of the Code. As a result of the Tax Cuts and Jobs Act of 2017 (the “Act”), for tax years beginning after December 31, 2017, Section 162(m) of the Code limits to $1 million the federal income tax deduction we can receive for annual individual compensation paid to certain current and former executive officers, subject to a transition rule for written binding contracts in effect on November 2, 2017, and not materially modified after that date. Prior to the Act, Section 162(m)’s deduction limit included an exception for “performance-based” compensation that permitted qualifying compensation to be deductible even if it exceeded the $1 million limit. Significant aspects of the Company’s compensation programs were designed to permit (but not require) compensation to qualify for this performance-based exception. To accomplish this, the Company previously asked shareholders to approve equity and incentive compensation plans that included limitations and provisions required to be included under Section 162(m). Now that the performance-based compensation exception is no longer available, the Company will no longer include specific Section 162(m)-related limitations or provisions or request shareholder approval for this purpose, and generally will not attempt to meet the requirements previously included in our plans related to the now eliminated performance-based exception as there is no tax benefit from doing so. The Company will continue to seek shareholder approval of certain compensation plans as may be required by applicable law or regulation.


Section 162(m) of the Internal Revenue Code (“Section 162(m)”) generally disallows a tax deduction to a public corporation for compensation over $1,000,000 paid in any fiscal year to a company’s chief executive officer or other named executive officers (excluding the company’s principal financial officer, in the case of tax years commencing before 2018). However, in the case of tax years commencing before 2018, the statute exempted qualifying performance-based compensation from the deduction limit if certain requirements were met. Section 162(m) was amended in December 2017 by the Tax Cuts and Jobs Act to eliminate the exemption for performance-based compensation (other than with respect to payments made pursuant to certain “grandfathered” arrangements entered into prior to November 2, 2017) and to expand the group of current and former executive officers who may be covered by the deduction limit under Section 162(m). While Aramark’s shareholder approved incentive plans were previously structured to provide that certain awards could be made in a manner intended to qualify for the performance-based compensation exemption, that exemption will no longer be available for future tax years (other than with respect to certain “grandfathered” arrangements as noted above). The Compensation Committee expects in the future to authorize compensation in excess of $1,000,000 to named executive officers that will not be deductible under Section 162(m) when it believes doing so is in the best interests of Aramark and its shareholders.

Costco Wholesale Corporation

Our RSU grants impose performance conditions for the CEO and executive vice presidents. These conditions for fiscal 2018 and prior years were intended to qualify the awards as tax-deductible under section 162(m) of the Internal Revenue Code. As a result of changes in December 2017 to federal tax laws, we expect that equity awards granted or other compensation provided under arrangements entered into or materially modified after November 2, 2017 generally will not be deductible to the extent they result in compensation to certain executive officers that exceeds $1 million in any one year for any such officer. Due to uncertainties as to the application and interpretation of Section 162(m), including the scope of the transition relief under the legislation repealing the exemption the Section 162(m) deduction limit, no assurance can be given that compensation intended to satisfy the requirements for exemption in fact will do so.

Because of the importance of linking pay and performance, RSU grants made for fiscal 2019 continued to impose performance conditions on grants to the CEO and executive officers.

Becton, Dickinson and Company

Section 162(m) of the Internal Revenue Code precludes BD from taking a federal income tax deduction for compensation paid in excess of $1 million to our “covered employees” (which includes the CEO and our three other most highly-compensated executive officers, other than the Chief Financial Officer, for years prior to 2018). Prior to 2018 (and including tax years that began prior to January 1, 2018), this limitation did not apply to “performance-based” compensation. While the Compensation Committee has generally attempted to maximize the tax deductibility of executive compensation, the Compensation Committee believes that the primary purpose of our compensation program is to support BD’s business strategy and the long-term interests of our shareholders. Therefore, the Compensation Committee has maintained the flexibility to award compensation that may not be tax-deductible if doing so furthers the objectives of our executive compensation program.

Under the recent U.S. tax reform, the exception to Section 162(m) for performance-based compensation has been repealed for tax years beginning after December 31, 2017, subject to certain transition and grandfathering rules. In addition, the Chief Financial Officer will be included as a covered employee.   Despite these new limits on the deductibility of performance-based compensation, the Compensation Committee continues to believe that a significant portion of our named executive officers’ compensation should be tied to BD’s performance. Therefore, it is not anticipated that the changes to Section 162(m) will significantly impact the design of our compensation program going forward.

Finally, if you are going to amend a compensation plan, perhaps the disclosures become far more complex. For instance, CBS Corporation amended a plan to extend the term, and included the following disclosure:

Prior to the enactment of the Act, Section 162(m) generally limited to $1 million the federal tax deductibility of some forms of compensation paid in one year to the chief executive officer and the three other most highly compensated executive officers employed by the Company at the end of the year (other than the Company’s chief financial officer) and provided that performance-based compensation may qualify for an exception to the limit on deductibility, if, among other requirements, the plan under which such compensation is paid met certain requirements, including stockholder approval. The Current Plan was originally designed to permit awards that would comply with this Section 162(m) Exception. As a result of the Act enacted in December 2017, significant changes were made to Section 162(m), including expanding the number of individuals covered by Section 162(m) and the elimination of the Section 162(m) Exception, effective for taxable years beginning after December 31, 2017. However, the Act also includes Transition Relief, pursuant to which these changes to Section 162(m) will not apply to compensation payable under a written binding agreement that was in effect on November 2, 2017 that is not subsequently materially modified, and which compensation otherwise would have been deductible under Section 162(m) prior to the effective time of the Act.

The Company believes it is important to preserve the ability to continue to use the Section 162(m) Exception, to the extent such exception remains available under the Act. Because of the uncertainties in the interpretation of Section 162(m) as amended by the Act, including in the interpretation of the scope of the Transition Relief, the Amended Plan continues to include provisions relating to Section 162(m), including with respect to the Section 162(m) Exception. Such provisions in the Amended Plan will only apply to the extent required to comply with the Section 162(m) Exception to the extent such exception remains available under the Act by means of guidance relating to the Transition Relief or otherwise. Because of the uncertainties in the interpretation of Section 162(m) as amended by the Act, no assurance can be given that awards under the Amended Plan that had been intended to qualify for the Section 162(m) Exception will be deductible under these transition relief rules. To the extent that the transition relief rules do not apply to an award under the Amended Plan, such awards may not be deductible under the Section 162(m) Exception.

As described above, awards under the Amended Plan may continue to qualify for the Section 162(m) Exception. To continue to qualify, the material terms of the performance goals under which compensation may be paid must be disclosed to and approved by the stockholders. For purposes of Section 162(m), the material terms include (i) the individuals eligible to receive compensation, (ii) a description of the business criteria on which the performance goal is based, and (iii) the maximum amount of compensation that can be paid to an individual under the performance goal. Each of these aspects is discussed above, and stockholder approval of the Amended Plan will be deemed to constitute approval of each of these aspects of the Amended Plan for purposes of the stockholder approval requirements of Section 162(m).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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