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As Agenda has reported, CEOs will see some changes to their incentive pay plans as a result of the Tax Cuts and Jobs Act passed last month. The law reforms Section 162(m) of the tax code, which allowed companies to deduct performance-based equity pay from their taxes. Under the new rules, the deduction is eliminated.
Experts say that the deduction, which was added to the tax code in 1993, is one reason that CEOs are paid largely in equity; however, because stock-based pay is popular with shareholders, the proportion of stock-based pay that CEOs receive is not likely to decrease significantly. Nevertheless, there are several changes to the structure of incentive pay programs that may take place now that the strict 162(m) rules governing incentive pay are no longer relevant. Comp committee members should understand these changes as they develop incentive programs for their CEO’s next pay period, says Deb Lifshey, managing director at Pearl Meyer.
“Companies will have flexibility to use real measures to drive their strategy,” she says. Lifshey says she expects companies will move to eliminate wrapper or umbrella plans, which enabled them to use subjective metrics, rather than the strict, financial ones required by the 162(m) rules.
“Your measures will be your measures,” Lifshey says. “That’s the silver lining—certainly [companies] lose deductibility, but what you gain is a lot of flexibility. Companies will now have the ability to change their metrics, and they won’t have to set metrics in the first 90 days. They’ll have the discretion to adjust upward.”