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Companies Making Few Adjustments Despite 162(m) Changes

Published on: October 13, 2018

Topics: Tax and Accounting

A review of S&P 500 proxies filed in 2018 shows most companies do not anticipate changes to their performance-based executive incentive plans as a result of tax reform, Bloomberg Law reported this week. Although the Tax Cuts and Jobs Act of 2017 eliminated the exclusion for performance-based pay, under section 162(m) of the Internal Revenue Code, potentially removing part of the incentive to make pay performance-based, unsurprisingly, companies by and large have not chosen to make changes other than ceasing references to 162(m) deductibility in their proxy statements. While there have been a few exceptions - Netflix made headlines last year by scrapping cash bonuses entirely in favor of higher salaries for top executives - most companies have taken a more conservative approach given investor expectations and prevailing board views.

However, as the Bloomberg article points out, many companies are hesitant to make any kind of change for fear it will affect the grandfathered status of their existing incentive plans, assuming the limited grandfather provisions apply. Once those plans are phased out, companies may consider more creative changes to plans, including spreading out compensation over time through deferrals, increasing participation in pensions or 401ks, and (perhaps most likely) using non-quantitative metrics, such as safety, quality or ESG-based metrics, in performance plans.  Other changes, such as setting the performance goals later in the performance period, are not being used. 

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