The Advisors' Blog

– Lynn Jokela

When considering whether to modify or substitute equity awards or executive compensation plans in response to economic fallout from the Covid-19 pandemic, this Proskauer blog reminds companies to consider possible plan limitations as well as issues relating to Section 409A of the Internal Revenue Code and potential limitations under Section 162(m) of the Code.  Here’s an excerpt about plan limitation considerations:

Prior to taking any actions with respect to their incentive compensation plans, companies should review the terms of the plans to understand the compensation committee’s rights under the plan to amend performance metrics or target compensation levels.  Plan provisions that could be problematic include provisions that prohibit amendments to outstanding awards or that do not provide sufficient authority to the compensation committee to exercise discretion in adjusting performance metrics, interpreting performance metrics or determining award payouts.  Similarly, plans (or the underlying award agreements) may not provide sufficient discretion for compensation committees to adjust results in order to disregard the effects of COVID-19.  However, even if plans permit adjustments, adjustments for COVID-19’s widespread impact may not be determinable or may be so significant that any possible determination of financial results excluding COVID-19 would be impracticable or may not be consistent with other provisions of the plan (e.g., provisions governing minimum vesting).  Companies should also consider whether actions that they take could be deemed to reduce or materially and adversely affect award holders, in which case, award holder consent may be required.