October 27, 2011
Known Unknowns: Meeting 162(m) in Corporate Transactions
– Steve Seelig and Russ Hall, Towers Watson
Recently, we’ve been asked by several clients if they can craft their performance-based incentive plans to preserve tax deductibility under Code Section 162(m) (the million-dollar pay cap) in the event of a corporate acquisition, reorganization or recapitalization. We’ve also read articles suggesting that this goal can be accomplished through careful planning, with one stating: “If the Compensation Committee’s authority to make adjustments is not properly structured and designed, then any adjustment will cause the bonus award to be considered non-performance-based compensation, and [thus] may not be tax deductible by the company.”
Based on that promising statement, we’ve thought hard about the meaning of “properly structured” and have concluded there is no one-size-fits-all approach that can be employed by all companies in every situation. That said, there are strategies that can maximize companies’ chances for success, depending on their specific circumstances. Also, keep in mind that the Section 280G rules may also come into play with regard to the tax treatment of payments that occur due to corporate transactions; these rules need to be carefully considered in tandem with 162(m). Learn more in our Bulletin.