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After working to reconcile differences between the two Tax Cuts and Jobs Act bills, the Senate and House Conference Committee reached a tentative agreement on Wednesday, December 13. Although there is not yet a published version of the Conference Committee’s bill, both the Senate and House had proposed adding a new Section 4960 to the Internal Revenue Code (Code) which would, effective for taxable years beginning after December 31, 2017, impose an excise tax of 20% on certain compensation paid to a covered employee by a tax-exempt organization in excess of $1,000,000 and for certain excess parachute payments. The excise tax would be payable by the tax-exempt organization.  This post summarizes key provisions of the proposed excise tax provision.

General Rule:  Tax-exempt organizations will be required to pay a 20% excise tax equal to 20% of the sum of (i) remuneration paid in excess of $1,000,000 during a taxable year to a covered employee and (ii) any excess parachute payment paid to the employee by such organization during such year.  The proposed statutory text notes, though, in relevant part that any such amounts shall be considered “paid” for this purpose when there is no substantial risk of forfeiture. Continue Reading The Tax Cuts and Jobs Act-Understanding the Proposed Excise Tax On Tax-Exempt Organizations

On November 16, 2017, Institutional Shareholder Services (ISS) published its updated proxy voting guidelines for the US, Canada, and Brazil effective for shareholder meetings that occur on or after February 1, 2018. In addition to many other changes, ISS addressed two issues that relate to compensation programs that should be considered by public company clients.

First, ISS added a problematic compensation practice related to non-employee director compensation. ISS notes that it will generally vote against the members of the board committee responsible for non-employee director compensation if there is a pattern of awarding excessive compensation to non-employee directors.  Although excessive is not defined, ISS notes that it has identified cases of “extreme outliers” of non-employee director compensation relative to peers and the broader market so it appears that peer data will be used as a justification for identifying excessive compensation.  Additionally, because a pattern of excessive compensation is the trigger for a negative vote (as opposed to a single instance), ISS will not consider non-employee director compensation for vote recommendations in 2018, but may take current compensation into account in the future if a pattern of excessive compensation is identified in consecutive years.

Second, ISS updated guidance regarding the responsiveness of the company’s board of directors to an advisory vote of less than 70% in favor of executive compensation. ISS will consider a failure to adequately respond to investors following a previous say-on-pay vote that received less than 70% support on a case-by-case basis when evaluating ballot items related to executive compensation.  Factors considered when evaluating the company’s response include:

  • Disclosure of engagement efforts with institutional investors (including the timing and frequency of engagements and whether independent directors participated);
  • Disclosure of specific concerns voiced by such investors that led to voting against the say-on-pay proposal;
  • Disclosure of specific actions taken by the company in response to such concerns; and
  • Disclosure of any other recent changes in the compensation program made by the company.

ISS notes that independent director participation in any engagement with shareholders is preferred as being more conducive to receiving candid shareholder feedback. ISS also notes that it wants a summary of the concerns raised to more effectively evaluate whether changes are responsive to the feedback and to evaluate not just whether changes were made but whether quality changes were made.

During the two years following the SEC’s publication of final rules that require that companies satisfy the pay ratio disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act beginning in 2018 proxy statements, many public companies, hoping for a repeal or delay in the implementation of the rules, have waited to take the significant preparatory steps necessary for compliance.  As there has been no reprieve in the deadline — the pay ratio is still required to be disclosed in 2018 proxy statements — the time for procrastination has ended, and public company clients need to take immediate steps to ensure compliance in 2018.

Briefly, the pay ratio disclosure contained in Item 402(u) of Regulation S-K requires public companies to disclose:

  • The median of the annual total compensation of all employees of such public company other than the CEO;
  • The annual total compensation of the CEO; and
  • The ratio of those two amounts.

Continue Reading The Time for Procrastination is Over: The Pay Ratio Has Arrived

On November 2, 2017, H.R.1 or the Tax Cuts and Jobs Act (the “House Bill”) was introduced in the House of Representatives. The House Bill initially proposed to make sweeping changes to executive compensation provisions in the Internal Revenue Code of 1986, as amended (the “Code”).  Among other changes, as initially proposed, the House Bill proposed to:

  • Repeal Sections 409A and 457A of the Code and replace such Sections with Section 409B of the Code. While the repeal of Sections 409A and 457A would have been welcome news for many companies over the last ten or fifteen years, Section 409B would effectively prohibit the deferral of all compensation past the point in time when such compensation is no longer subject to a substantial risk of forfeiture related to the performance of services. Section 409B would apply to stock options as well (which were generally excluded from Sections 409A and 457A). The only exception to this rule would be the taxation of the transfer of property pursuant to Section 83 of the Code (other than stock options). While onerous, Section 409A at least permitted the deferral of compensation if certain requirements were met. Section 457A prohibited the deferral of compensation for service providers of nonqualified entities, which were limited and did not apply to most domestic entities. However, Section 409B effectively takes the requirements of Section 457A and makes them applicable to all companies.
  • Repeal the performance-based compensation exception of Section 162(m) of the Code. All compensation paid to covered employees would only be deductible up to $1,000,000 regardless of whether the compensation was structured as performance-based compensation or not. The House Bill also expands the definition of the companies subject to Section 162(m), expands the definition of covered employee and makes the designation of any person as a covered employee permanent rather than a year by year determination for years after 2017.
  • Add an excise tax of 20% for compensation paid by a tax-exempt organization in excess of $1,000,000. The excise tax is payable by the tax-exempt organization.

Continue Reading The Tax Cuts and Jobs Act-Tax Reform May Drastically Change Executive Compensation