Published on: April 7, 2022
Authors: Michele A. Carlin
With the elimination of the performance-based exception to deductible compensation limits under IRC Section 162(m), companies will have the opportunity to simplify their incentive structures. No longer facing requirements for “pre-establishing” goals and setting targets within a strict time line, companies will have greater flexibility and freedom to determine the performance metrics and targets used in their incentive plans.
This flexibility comes at a time when investors and other stakeholders are paying increasing attention to how companies select metrics and set targets in their executive incentive plans. One of the most challenging issues in this debate involves the appropriateness of using metrics that incorporate “adjustments” to publicly reported measures that conform to Generally Accepted Accounting Principles (or, GAAP). In 2017, 95% of companies in the S&P 500 disclosed at least one non-GAAP metric1, and the use of incentive plan metrics that incorporate adjustments to GAAP is commonplace.