The Advisors' Blog

It appears that if there’s one thing we can count on in 2025, it’s uncertainty. Market swings and unpredictable business conditions complicate things for compensation committees. But as Dave recently wrote on TheCorporateCounsel.net, “we’ve seen this movie before” – and fortunately, we’ve got a solid playbook to pull from.

One great addition to that toolkit is this Gibson Dunn blog – which revisits “lessons learned” from the 2008 financial crisis and the COVID-19 pandemic and applies them to today’s rocky road. Here’s an excerpt:

The Road to a 409A Issue is Paved with Good Intentions

An executive or other service provider may elect to forego current compensation to conserve free cash flow, for internal or external optics, or other reasons relevant to the company. Salary and perquisites tend to be the first looked to for adjustment, with bonuses and long-term compensation trailing. Regardless of the bucket of compensation reduced or eliminated, a service provider who agrees to a reduction may ask for a “make-whole” or similar commitment from the company.

This can raise the specter of Internal Revenue Code Section 409A in two key ways: (1) creating new deferred compensation, and (2) impermissibly deferring compensation from one year to the next. The former impacts how the compensation can be structured, can limit flexibility to amend or terminate the arrangement in the future, and can result in payroll tax being incurred in an earlier year than the compensation is delivered. Impermissibly deferring compensation from one year to the next can come with accelerated income inclusion, a hefty 20% additional tax to the service provider, and potential reporting and withholding consequences to the employer.

In any case where a service provider forgoes compensation otherwise promised, and especially if there is an element of a “make-whole” or similar commitment, this should be structured carefully and in coordination with counsel.

The blog also raises these points:

1. Be mindful of how declining stock prices affect equity award sizing and award values. For more suggestions on handling those issues, check out my 2022 blog on managing your burn rate and Emily’s review of equity grant practices during volatile times.

2. Tread carefully on any modifications to in-flight awards – they’re a “third rail” for investors.

3. For committees in the process of establishing new programs or goals, build in flexibility and set goals and metrics that can withstand continued uncertainty. Emily’s blog on pandemic-era compensation practices is worth revisiting for ideas.

The Gibson Dunn team recommends a “learn-and-see” approach right now – consistent review of relevant data sets, coordinating with external advisers, and leaving aside one-size-fits-all programs in favor of understanding practices specific to the industry.

– Liz Dunshee