Compensation Season 2020

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2020-01-23

Posted by Jeannemarie O’Brien, Andrea Wahlquist, and Adam Shapiro, Wachtell, Lipton, Rosen & Katz, on Thursday, January 23, 2020
Editor's Note: Jeannemarie O’Brien, Andrea Wahlquist, and Adam Shapiro are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Ms. O’Brien, Ms. Wahlquist, Mr. Shapiro, David E. Kahan, Michael J. Schobel, and Erica E. Bonnett. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

While the past year witnessed only modest changes to the rules governing compensation arrangements, practices and trends continued to evolve. We note below various developments worthy of consideration in the year ahead.

Limits on Compensation Deductions Clarified. The IRS issued proposed regulations in December with respect to the 2017 statutory change that significantly expanded the scope of the $1 million annual limitation on the deductibility of compensation paid to specified executives under §162(m) of the tax code. The proposed rules clarify, among other things, that the limitation on deductibility will apply to executives of successor entities in M&A transactions if the executives were previously covered by these limits. In addition, the proposed regulations may extend the application of §162(m) to cover executives of private companies with publicly-traded debt and executives of foreign private issuers. For a more detailed discussion of the proposed regulations, see our December 19, 2019 memorandum. Companies should carefully track their covered employees, avoid unnecessary classification of employees as executive officers and take care to preserve arrangements that are grandfathered for §162(m) purposes. (more…)