Christopher A. McMican, Member of the Firm in the Employee Benefits practice, in the firm’s Detroit and Chicago offices, was quoted in Law360, in “#MeToo, Tax Cuts, Lawsuits Complicate Exec Compensation,” by Emily Brill. (Read the full version – subscription required.)
Following is an excerpt:
Tuesday’s Internal Revenue Service guidance on how to interpret CEO pay rules came at a tumultuous time for the executive compensation practice area, with the Tax Cuts and Jobs Act, lawsuits over pay-setting practices and the #MeToo movement all affecting the legal landscape. …
December’s Tax Cuts and Jobs Act brought a big change to the executive compensation arena: It placed a $1 million limit on the amount of performance-based executive pay that a publicly traded company could deduct during tax season.
The change to Section 162(m) of the Internal Revenue Code applied to executive pay agreements reached after Nov. 2, 2017. Lawmakers assured employers that contracts signed before that date could follow Section 162(m)’s old rules, as long as the agreements hadn’t been modified since Nov. 2 and the contractual language obliged employers to pay executives more than $1 million if they met certain performance goals.
It sounds simple enough, but questions lingered about what constituted an obligation to pay, attorneys say.
Many executive pay arrangements grant corporate boards a type of oversight called negative discretion, which allows boards to decrease executives’ performance-based pay if necessary. Attorneys wondered if employers could still be considered obligated to pay $1 million or more if the contract contained a negative discretion clause. …
Amid the confusion, some companies are considering restructuring their executive pay packages to make less of the compensation performance-based, Epstein Becker Green attorney Christopher McMican said.
McMican said he sees many companies keeping executive pay packages largely performance-based, though, because it’s a method that’s good for the company and popular with shareholders.
“I see most companies staying the course,” McMican said. “[They say], ‘It’s still important to us, even though we don’t get deductibility for it, to only pay those top-tier amounts out when our executives actually perform and the company rises in value.’”