162 (m) opções de estoque

26 CFR 1.162-27 - Certas remunerações dos empregados superiores a US $ 1.000.000.

(a) Escopo. Esta seção fornece regras para a aplicação do limite de dedução de US $ 1 milhão nos termos da seção 162 (m) do Código da Receita Federal. O parágrafo (b) desta seção fornece a regra geral que limita as deduções nos termos da seção 162 (m). O parágrafo (c) desta seção fornece definições de termos geralmente aplicáveis. O parágrafo (d) desta seção fornece uma exceção do limite de dedução para compensação pagável em comissão. O parágrafo (e) desta seção fornece uma exceção para compensação baseada em desempenho qualificada. Os parágrafos (f) e (g) desta seção fornecem regras especiais para empresas que se tornam empresas de capital aberto e pagamentos que estão sujeitos à seção 280G, respectivamente. O parágrafo (h) desta seção fornece regras de transição, incluindo as regras para os contratos que são de direito adquirido e não estão sujeitas à seção 162 (m). O parágrafo (j) desta seção contém as disposições de vigência da data. Para as regras relativas à dedutibilidade da compensação por serviços que não estão abrangidos pela seção 162 (m) e nesta seção, veja a seção 162 (a) (1) e & # xA7; 1.162-7. Esta seção não é determinante para saber se a compensação atende aos requisitos da seção 162 (a) (1).

(b) Limitação de dedução. A seção 162 (m) exclui uma dedução ao abrigo do capítulo 1 do Código da Receita Federal por qualquer empresa de capital aberto por compensação paga a qualquer empregado coberto, na medida em que a remuneração pelo exercício tributável exceda US $ 1.000.000.

(1) Empresa aberta -

(i) Regra geral. Uma corporação de capital aberto significa qualquer corporação que emita qualquer classe de títulos de capital comum exigidos para serem registrados de acordo com a seção 12 da Lei de Câmbio. Uma corporação não é considerada pública se o registro de seus títulos de capital é voluntário. Para os fins desta seção, se uma corporação é detida publicamente é determinada com base somente se, a partir do último dia do seu ano fiscal, a corporação está sujeita às obrigações de relatório da seção 12 da Lei de Câmbio.

(ii) Grupos afiliados. Uma empresa de capital aberto inclui um grupo de empresas afiliadas, conforme definido na seção 1504 (determinado sem consideração a seção 1504 (b)). Para os propósitos desta seção, no entanto, um grupo de empresas afiliadas não inclui nenhuma subsidiária que seja ela própria uma corporação aberta. Essa subsidiária pública e suas subsidiárias (se houver) estão sujeitas separadamente a esta seção. Se um empregado coberto for remunerado em um ano tributável por mais de um membro de um grupo afiliado, a remuneração paga por cada membro do grupo afiliado é agregada com a remuneração paga ao empregado coberto por todos os outros membros do grupo. Qualquer quantia não permitida como dedução nesta seção deve ser rateada entre as empresas pagadoras na proporção do montante da compensação paga ao empregado coberto por cada uma dessas corporações no ano tributável.

(2) Funcionário coberto -

(i) Regra geral. Um empregado coberto significa qualquer pessoa que, no último dia do ano tributável, seja -

(A) O diretor executivo da corporação ou atua em tal capacidade; ou.

(B) Entre os quatro oficiais compensados mais altos (exceto o diretor executivo).

(ii) Aplicação das regras da Securities and Exchange Commission. Se um indivíduo é o diretor executivo descrito no parágrafo (c) (2) (i) (A) desta seção ou um oficial descrito no parágrafo (c) (2) (i) (B) desta seção é determinado de acordo com às regras de divulgação de compensação de executivos ao abrigo do Exchange Act.

(i) Em geral. Para fins da limitação de dedução descrita no parágrafo (b) desta seção, a compensação significa o valor agregado permitido como dedução ao abrigo do capítulo 1 do Código da Receita Federal para o ano fiscal (determinado sem consideração a seção 162 (m)) por remuneração para os serviços prestados por um empregado coberto, independentemente de os serviços serem ou não realizados durante o ano tributável.

(ii) Exceções. A compensação não inclui -

(A) Remuneração abrangida na seção 3121 (a) (5) (A) através da seção 3121 (a) (5) (D) (referente a remuneração que não é tratada como salário para fins da Lei de Contribuições de Seguro Federal); e.

(B) Remuneração constituída por qualquer benefício prestado ou em nome de um empregado se, no momento em que o benefício é prestado, é razoável acreditar que o empregado poderá excluí-lo da renda bruta. Além disso, a compensação não inclui as contribuições de redução salarial descritas na seção 3121 (v) (1).

(4) Comitê de Remuneração. O comitê de remuneração significa o comitê de diretores (incluindo qualquer subcomitê de diretores) da empresa de capital aberto que tem autoridade para estabelecer e administrar os objetivos de desempenho descritos no parágrafo (e) (2) desta seção e certificar que os objetivos de desempenho são alcançado, conforme descrito no parágrafo (e) (5) desta seção. Um comitê de diretores não é tratado como não ter autoridade para estabelecer metas de desempenho apenas porque os objetivos são ratificados pelo conselho de administração da corporação pública ou, se for caso disso, por qualquer outro comitê do conselho de administração. Veja o parágrafo (e) (3) desta seção para as regras relativas à composição do comitê de compensação.

(5) Exchange Act. O Exchange Act significa o Securities Exchange Act de 1934.

(6) Exemplos. Este parágrafo (c) pode ser ilustrado pelos seguintes exemplos:

(d) Exceção para compensação paga em comissão. O limite de dedução no parágrafo (b) desta seção não se aplica a nenhuma compensação paga com base em comissão. Para o efeito, a compensação é paga com base em comissão se os fatos e circunstâncias mostrem que é pago unicamente por conta do resultado gerado diretamente pelo desempenho individual do indivíduo a quem a remuneração é paga. A remuneração não deixa de ser atribuível diretamente ao indivíduo, apenas porque serviços de suporte, como serviços de secretaria ou de pesquisa, são utilizados na geração de renda. No entanto, se a remuneração for paga em função de padrões de desempenho mais amplos, como a renda produzida por uma unidade de negócios da corporação, a compensação não é qualificada para a exceção prevista no presente parágrafo (d).

(e) Exceção para remuneração baseada em desempenho qualificada -

(1) Em geral. O limite de dedução no parágrafo (b) desta seção não se aplica a remuneração qualificada baseada em desempenho. A compensação qualificada baseada no desempenho é uma compensação que atende a todos os requisitos dos parágrafos (e) (2) a (e) (5) desta seção.

(2) Requisito de objetivo de desempenho -

(i) Meta pré-estabelecida. A remuneração qualificada baseada no desempenho deve ser paga unicamente em função da realização de um ou mais objetivos de desempenho objetivos pré-estabelecidos. Uma meta de desempenho é considerada pré-estabelecida se for estabelecida por escrito pelo comitê de compensação no prazo de 90 dias após o início do período de serviço ao qual a meta de desempenho se relaciona, desde que o resultado seja substancialmente incerto no momento em que a comissão de compensação realmente estabelece o objetivo. No entanto, em nenhum caso, um objetivo de desempenho será considerado pré-estabelecido se for estabelecido após 25% do período de serviço (conforme agendado de boa fé no momento em que o objetivo é estabelecido) tenha decorrido. Um objetivo de desempenho é objetivo se um terceiro ter conhecimento dos fatos relevantes pudesse determinar se o objetivo foi atingido. Os objetivos de desempenho podem ser baseados em um ou mais critérios de negócios que se aplicam ao indivíduo, a uma unidade de negócios ou à corporação como um todo. Esses critérios de negócios podem incluir, por exemplo, o preço das ações, a participação no mercado, as vendas, o lucro por ação, o retorno sobre o patrimônio líquido ou os custos. Um objetivo de desempenho não precisa, no entanto, ser baseado em um aumento ou resultado positivo sob um critério de negócios e poderia incluir, por exemplo, manter o status quo ou limitar perdas econômicas (medidas, em cada caso, por referência a um critério comercial específico) . Um objetivo de desempenho não inclui o mero emprego contínuo do empregado coberto. Assim, uma provisão de aquisição baseada exclusivamente no emprego continuado não constitui um objetivo de desempenho. Veja o parágrafo (e) (2) (vi) desta seção para as regras de compensação que se baseiam em um aumento no preço do estoque.

(ii) fórmula de compensação objetiva. Um objetivo de desempenho pré-estabelecido deve indicar, em termos de fórmula ou padrão objetivo, o método para calcular o montante da remuneração a pagar ao empregado se o objetivo for atingido. Uma fórmula ou padrão é objetivo se um terceiro ter conhecimento dos resultados de desempenho relevantes pudesse calcular o valor a ser pago ao empregado. Além disso, uma fórmula ou padrão deve especificar os funcionários individuais ou a classe de funcionários a que se aplica.

(A) Os termos de uma fórmula ou padrão objetivo devem excluir o poder discricionário para aumentar o valor da remuneração a pagar que, de outra forma, seria devido após a consecução do objetivo. Um objetivo de desempenho não é discricionário para os propósitos deste parágrafo (e) (2) (iii) simplesmente porque o comitê de compensação reduz ou elimina a compensação ou outro benefício econômico que foi devido após a consecução do objetivo. No entanto, o exercício de discrição negativa em relação a um funcionário não é permitido para resultar em um aumento no montante a pagar a outro empregado. Assim, por exemplo, no caso de uma associação de bônus, se o valor a pagar a cada funcionário for declarado em termos de porcentagem do grupo, a soma dessas porcentagens individuais do pool não poderá exceder 100%. Se os termos de uma fórmula ou padrão objetivo não impedirem o poder discricionário de aumentar o valor da compensação, apenas porque o montante da remuneração a ser paga após a consecução da meta de desempenho se baseia, no todo ou em parte, em uma porcentagem do salário ou da base pagamento e o valor em dólares do salário ou salário base não é fixado no momento em que a meta de desempenho é estabelecida, então a fórmula ou padrão objetivo não será considerado discricionário para fins deste parágrafo (e) (2) (iii) se o O valor máximo em dólares a ser pago é fixado nesse momento.

(B) Se a remuneração for pagável após a consecução de uma meta de desempenho, e uma mudança for feita para acelerar o pagamento da remuneração a uma data anterior após a consecução do objetivo, a mudança será tratada como um aumento no valor de compensação, a menos que o montante da compensação paga seja descontado para refletir razoavelmente o valor do tempo do dinheiro. Se a remuneração for paga após a consecução de uma meta de desempenho e uma alteração for feita para adiar o pagamento de uma remuneração para uma data posterior, qualquer valor pago em excesso do montante inicialmente devido ao empregado não será tratado como um aumento no montante da compensação se o montante adicional se basear em uma taxa de juros razoável ou em um ou mais investimentos reais predeterminados (independentemente de os ativos associados ao valor originalmente devido estão realmente investidos no mesmo), de modo que o valor a pagar pelo o empregador na data posterior será baseado na taxa de retorno real de um investimento específico (incluindo qualquer diminuição, bem como qualquer aumento no valor de um investimento). Se a compensação for paga sob a forma de propriedade, uma alteração no momento da transferência dessa propriedade após a consecução do objetivo não será tratada como um aumento no valor da compensação para os fins deste parágrafo (e) (2) (iii). Assim, por exemplo, se os termos de uma bolsa de ações fornecerem ações para serem transferidas após a consecução de uma meta de desempenho e a transferência do estoque também está sujeita a um cronograma de aquisição, uma mudança no cronograma de aquisição que acelera ou defaça a transferência de ações não será tratada como um aumento no valor da compensação a pagar de acordo com a meta de desempenho.

(C) A compensação atribuível a uma opção de compra de ações, direito de valorização de ações ou outra remuneração baseada em ações não deixa de satisfazer os requisitos deste parágrafo (e) (2) na medida em que uma alteração na concessão ou prêmio seja feita para reflete uma alteração na capitalização corporativa, como uma divisão ou dividendo de ações, ou uma transação corporativa, como qualquer fusão de uma corporação em outra corporação, qualquer consolidação de duas ou mais corporações em outra corporação, qualquer separação de uma corporação (incluindo uma spinoff ou outra distribuição de estoque ou propriedade por uma corporação), qualquer reorganização de uma corporação (quer essa reorganização esteja dentro da definição desse termo na seção 368), ou qualquer liquidação parcial ou completa por uma corporação.

(iv) Determinação de subvenção por concessão. A determinação de se a indemnização satisfaz os requisitos do presente parágrafo (e) (2) geralmente deve ser feita por concessão. Assim, por exemplo, se a compensação atribuível a uma outorga de opção de estoque satisfaz os requisitos deste parágrafo (e) (2) geralmente é determinada com base na concessão específica feita e sem os termos de qualquer outra opção de concessão ou outra concessão de compensação, ao mesmo ou a outro empregado. Como outro exemplo, exceto o disposto no parágrafo (e) (2) (vi), se uma concessão de estoque restrito ou outra compensação baseada em estoque satisfaz os requisitos deste parágrafo (e) (2) é determinada sem considerar se dividendos, equivalentes de dividendos ou outras distribuições similares com relação ao estoque, em tais compensações com base em ações são pagáveis antes da realização do objetivo de desempenho. Os dividendos, equivalentes de dividendos ou outras distribuições similares com relação a ações que são tratadas como subsídios separados de acordo com este parágrafo (e) (2) (iv) não são remuneração baseada em desempenho, a menos que satisfaçam separadamente os requisitos deste parágrafo (e) ( 2).

(v) Compensação dependente da realização do objetivo de desempenho. A compensação não satisfaz os requisitos deste parágrafo (e) (2) se os fatos e circunstâncias indicarem que o empregado receberia a totalidade ou parte da remuneração independentemente de o objetivo de desempenho ser atingido. Assim, se o pagamento de uma compensação sob uma concessão ou prêmio é apenas nominal ou parcialmente dependente da consecução de uma meta de desempenho, nenhuma das compensações pagáveis sob a concessão ou prêmio será considerada baseada em desempenho. Por exemplo, se um funcionário tiver direito a um bônus em qualquer um dos dois arranjos, onde o pagamento em um acordo baseado em não execução depende da incapacidade de atingir os objetivos de desempenho de acordo com um acordo baseado em desempenho, então nenhum dos dois arranjos prevê uma compensação que satisfaz os requisitos deste parágrafo (e) (2). A compensação não deixa de ser uma compensação qualificada baseada em desempenho, simplesmente porque o plano permite que a compensação seja paga após a morte, deficiência ou mudança de propriedade ou controle, embora a compensação efetivamente paga por esses eventos antes da realização do objetivo de desempenho não satisfazia os requisitos deste parágrafo (e) (2). Como uma exceção à regra geral estabelecida na primeira frase do parágrafo (e) (2) (iv) desta seção, a determinação de fatos e circunstâncias referida na primeira frase deste parágrafo (e) (2) (v) é feita levando em consideração todos os planos, acordos e acordos que prevêem uma compensação para o empregado.

(vi) Aplicação de requisitos para opções de ações e direitos de valorização de ações -

(A) Em geral. A compensação atribuível a uma opção de compra de ações ou a um direito de apreciação de ações é considerada como satisfazendo os requisitos deste parágrafo (e) (2) se a concessão ou a concessão for feita pela comissão de compensação; o plano sob o qual a opção ou o direito é concedido indica o número máximo de ações em relação às quais opções ou direitos podem ser concedidos durante um período especificado para qualquer empregado individual; e, nos termos da opção ou direito, o montante da remuneração que o empregado pode receber é baseado unicamente no aumento do valor da ação após a data da concessão ou prêmio. Um plano pode satisfazer o requisito de fornecer um número máximo de ações em relação às quais as opções de compra de ações e os direitos de valorização de ações podem ser concedidos a qualquer empregado individual durante um período especificado, se o plano especificar um número máximo agregado de ações em relação a quais opções de ações direitos de valorização de ações, ações restritas, unidades de ações restritas e outros prêmios com base em ações que podem ser concedidos a qualquer empregado individual durante um período especificado de acordo com um plano aprovado pelos acionistas de acordo com o & # xA7; 1.162-27 (e) (4). Se o montante da compensação que o empregado pode receber ao abrigo da concessão ou do prêmio não se baseia unicamente no aumento do valor da ação após a data de concessão ou prêmio (por exemplo, no caso de ações restritas ou uma opção que seja concedido com um preço de exercício inferior ao valor justo de mercado das ações a partir da data da concessão), nenhuma das indenizações atribuíveis à concessão ou ao prêmio é uma remuneração baseada em desempenho qualificada nos termos deste parágrafo (e) (2) ( através da). Se uma concessão de opção de compra de ações se baseia unicamente no aumento do valor da ação após a data da concessão ser determinada sem considerar qualquer equivalente de dividendos que possa ser devido, desde que o pagamento do equivalente de dividendo não seja subordinado ao exercício de a opção. A regra segundo a qual a compensação atribuível a uma opção de compra de ações ou de valorização de ações deve basear-se unicamente no aumento do valor do estoque após a data da concessão ou do prêmio não se aplicar se a concessão ou o prêmio for feito por conta, ou se A aquisição ou exercício da concessão ou outorga depende da realização de uma meta de desempenho que satisfaça os requisitos deste parágrafo (e) (2).

(B) Cancelamento e reapreciação. A compensação atribuível a uma opção de compra de ações ou de valorização de ações não satisfaz os requisitos deste parágrafo (e) (2) na medida em que o número de opções concedidas exceda o número máximo de ações para as quais as opções podem ser concedidas ao empregado conforme especificado no plano. Se uma opção for cancelada, a opção cancelada continua a ser contada em relação ao número máximo de ações para as quais as opções podem ser concedidas ao empregado de acordo com o plano. Se, após a concessão, o preço de exercício de uma opção for reduzido, a transação é tratada como um cancelamento da opção e uma concessão de uma nova opção. Nesse caso, tanto a opção que se considera cancelada como a opção que se considera concedida reduzem o número máximo de ações para as quais as opções podem ser concedidas ao empregado de acordo com o plano. Este parágrafo (e) (2) (vi) (B) também se aplica no caso de um direito de apreciação de ações onde, após a concessão, o valor de base em que a valorização de ações é calculada é reduzido para refletir uma redução na feira valor de mercado do estoque.

(vii) Exemplos. Este parágrafo (e) (2) pode ser ilustrado pelos seguintes exemplos:

(3) Diretores externos -

(i) Regra geral. A meta de desempenho em que a remuneração é paga deve ser estabelecida por um comitê de remuneração composto unicamente por dois ou mais diretores externos. Um diretor é um diretor externo se o diretor -

(A) Não é um funcionário atual da corporação pública;

(B) Não é um ex-funcionário da empresa de capital aberto que recebe uma remuneração por serviços anteriores (exceto os benefícios de um plano de aposentadoria qualificado) durante o ano tributável;

(D) Não recebe remuneração da empresa de capital aberto, direta ou indiretamente, em qualquer outra categoria que não seja diretor. Para esse efeito, a remuneração inclui qualquer pagamento em troca de bens ou serviços.

(ii) Remuneração recebida. Para os fins deste parágrafo (e) (3), a remuneração é recebida, direta ou indiretamente, por um diretor em cada uma das seguintes circunstâncias:

(A) Se a remuneração for paga, direta ou indiretamente, ao diretor pessoalmente ou a uma entidade em que o diretor tenha uma participação de propriedade beneficiária superior a 50%. Para o efeito, a remuneração é considerada paga quando efetivamente paga (e durante o resto desse ano tributável da corporação) e, se anteriormente, durante todo o período em que um contrato ou contrato de pagamento de remuneração está em circulação.

(B) Se a remuneração, diferente da remuneração de minimis, tiver sido paga pela companhia aberta em seu ano fiscal passivo anterior a uma entidade em que o diretor tenha uma participação de propriedade beneficiária de pelo menos 5% mas não mais de 50%. Para o efeito, a remuneração é considerada paga quando efetivamente paga ou, se anteriormente, quando a companhia aberta se torna passível de pagar.

(C) Se a remuneração, que não a remuneração de minimis, tenha sido paga pela empresa de capital aberto no ano fiscal passivo anterior a uma entidade pela qual o diretor trabalha por conta própria ou por conta própria, exceto como diretor. Para o efeito, a remuneração é considerada paga quando efetivamente paga ou, se anteriormente, quando a companhia aberta se torna passível de pagar.

(iii) Remuneração de minimis -

(A) Em geral. Para fins dos parágrafos (e) (3) (ii) (B) e (C) desta seção, a remuneração paga pela empresa de capital aberto em seu exercício fiscal anterior a uma entidade é de minimis se os pagamentos à entidade fizeram não exceda 5% da receita bruta da entidade pelo ano tributável que termina com ou dentro desse ano tributável anterior da companhia aberta.

(B) Remuneração por serviços pessoais e proprietários substanciais. Não obstante o parágrafo (e) (3) (iii) (A) desta seção, a remuneração superior a US $ 60.000 não é de minimis se a remuneração for paga a uma entidade descrita no parágrafo (e) (3) (ii) (B) desta seção, ou é pago por serviços pessoais a uma entidade descrita no parágrafo (e) (3) (ii) (C) desta seção.

(iv) Remuneração por serviços pessoais. Para fins do parágrafo (e) (3) (iii) (B) desta seção, a remuneração de uma empresa de capital aberto é para serviços pessoais se -

(A) A remuneração é paga a uma entidade para serviços pessoais ou profissionais, consistindo em serviços jurídicos, contábeis, de investimento bancário e de consultoria de gestão (e outros serviços similares que podem ser especificados pelo Comissário em decisões de receita, avisos ou outras orientações publicado no Boletim de Receita Interna), realizado para a empresa de capital aberto, e a remuneração não é por serviços acessórios à compra de bens ou à compra de serviços que não são serviços pessoais; e.

(B) O diretor executa serviços significativos (seja ou não como empregado) para a corporação, divisão ou organização similar (dentro da entidade) que realmente fornece os serviços descritos no parágrafo (e) (3) (iv) (A) desta seção para a empresa de capital aberto, ou mais de 50% das receitas brutas da entidade (para o ano fiscal passivo anterior da entidade) são derivadas dessa corporação, subsidiária ou organização similar.

(v) Entidade definida. Para os propósitos deste parágrafo (e) (3), entidade significa uma organização que é uma empresa unipessoal, confiança, propriedade, parceria ou corporação. O termo também inclui um grupo afiliado de corporações, conforme definido na seção 1504 (determinado sem consideração a seção 1504 (b)) e um grupo de organizações que seria um grupo afiliado, mas pelo fato de que uma ou mais organizações não são incorporadas . No entanto, as regras de agregação referidas na frase anterior não se aplicam para fins de determinar se um diretor possui um interesse de propriedade efetivo de pelo menos 5% ou superior a 50%.

(vi) Empregados e ex-oficiais. Se um diretor é um empregado ou um ex-oficial é determinado com base nos fatos no momento em que o indivíduo atua como diretor no comitê de remuneração. Assim, um diretor não está impedido de ser um diretor externo apenas porque o diretor é um ex-diretor de uma corporação que anteriormente era uma corporação afiliada da corporação aberta. Por exemplo, um diretor de uma empresa-mãe de um grupo afiliado não está impedido de ser um diretor externo apenas porque esse diretor é um ex-diretor de uma subsidiária afiliada que foi cindida ou liquidada. No entanto, um diretor externo não seria mais um diretor externo se uma corporação em que o diretor anteriormente era um funcionário tornou-se uma corporação afiliada da corporação aberta.

(vii) oficial. Somente para os fins deste parágrafo (e) (3), oficial significa um executivo administrativo que está ou estava em serviço regular e continuado. O termo implica a continuidade do serviço e exclui os empregados para uma transação especial e única. Um indivíduo que apenas tem (ou teve) o título de oficial, mas não a autoridade de um oficial, não é considerado um oficial. A determinação de se um indivíduo é ou foi um oficial baseia-se em todos os fatos e circunstâncias do caso particular, incluindo, sem limitação, a fonte da autoridade do indivíduo, o termo para o qual o indivíduo é eleito ou nomeado, e a natureza e extensão das funções do indivíduo.

(viii) Membros de grupos afiliados. Para os fins deste parágrafo (e) (3), os diretores externos do membro de um grupo afiliado em público são tratados como diretores externos de todos os membros do grupo afiliado.

(ix) Exemplos. Este parágrafo (e) (3) pode ser ilustrado pelos seguintes exemplos:

(ii) Assim, em 1998, 1999 e 2000, a remuneração é considerada paga pela Corporação W indiretamente a C pessoalmente nos termos do parágrafo (e) (3) (ii) (A) desta seção. Por conseguinte, em 1998, 1999 e 2000, C não é um diretor externo da Corporação W. O resultado teria sido o mesmo se a Corporação W obtivesse representações apropriadas, mas, no entanto, teve motivos para acreditar que estava pagando indiretamente a remuneração de C pessoalmente.

(4) Requisição de aprovação do acionista -

(i) Regra geral. Os termos materiais da meta de desempenho em que a remuneração deve ser paga devem ser divulgados e posteriormente aprovados pelos acionistas da companhia aberta antes da remuneração ser paga. Os requisitos deste parágrafo (e) (4) não estão satisfeitos se a compensação for paga independentemente de os termos materiais serem aprovados pelos acionistas. Os termos materiais incluem os funcionários elegíveis para receber compensação; uma descrição dos critérios comerciais sobre os quais a meta de desempenho é baseada; e o montante máximo de compensação que poderia ser pago a qualquer empregado ou a fórmula usada para calcular o valor da remuneração a ser paga ao empregado se o objetivo de desempenho for atingido (exceto que, no caso de uma fórmula baseada, no total ou em parte, em uma porcentagem do salário ou salário base, o valor máximo em dólares da remuneração que poderia ser pago ao empregado deve ser divulgado).

(ii) funcionários elegíveis. A divulgação dos funcionários elegíveis para receber uma compensação não precisa ser tão específica quanto a identificar os indivíduos em particular pelo nome. Uma descrição geral da classe de funcionários elegíveis por título ou classe é suficiente, como o diretor executivo e os vice-presidentes, ou todos os funcionários assalariados, todos os diretores executivos ou todos os funcionários-chave.

(iii) Descrição dos critérios de negócios -

(A) Em geral. A divulgação dos critérios comerciais em que se baseia a meta de desempenho não precisa incluir os objetivos específicos que devem ser satisfeitos de acordo com a meta de desempenho. Por exemplo, se um plano de bônus prevê que um bônus seja pago se o lucro por ação aumentar em 10%, o valor de 10% é um alvo que não precisa ser divulgado aos acionistas. No entanto, nesse caso, a divulgação deve ser feita de forma que o plano de bônus baseie-se em um critério comercial por ação. No caso de um plano segundo o qual os empregados podem receber opções de ações ou direitos de valorização de ações, nenhuma descrição específica dos critérios de negócios é necessária se as concessões ou prêmios forem baseados em um preço de ações que não seja inferior ao valor justo de mercado atual.

(B) Divulgação de informações confidenciais. Os requisitos deste parágrafo (e) (4) podem ser satisfeitos mesmo que as informações que de outra forma seriam um termo relevante de uma meta de desempenho não são divulgadas aos acionistas, desde que o comitê de compensação determine que a informação é confidencial, comercial ou comercial, cuja divulgação teria um efeito adverso na empresa de capital aberto. Se a divulgação afetaria negativamente a corporação é determinada com base nos fatos e circunstâncias. Se o comitê de compensação fizer tal determinação, a divulgação aos acionistas deve indicar a crença da comissão de compensação de que as informações são informações confidenciais comerciais ou comerciais, cuja divulgação afetaria negativamente a empresa. Além disso, a capacidade de não divulgar informações confidenciais não elimina o requisito de que a divulgação seja feita do montante máximo de compensação que é pagável a um indivíduo sob uma meta de desempenho. As informações confidenciais não incluem a identidade de um executivo ou a classe de executivos a que se aplica um objetivo de desempenho ou o montante da remuneração a pagar se o objetivo for satisfeito.

(iv) Descrição da compensação. A divulgação da compensação a pagar de acordo com uma meta de desempenho deve ser específica o suficiente para que os acionistas possam determinar o montante máximo de compensação que poderia ser pago a qualquer empregado individual durante um período especificado. Se os termos do objetivo de desempenho não prevêem um valor máximo em dólares, a divulgação deve incluir a fórmula segundo a qual a compensação será calculada. Assim, se a compensação atribuível ao exercício de opções de compra de ações for igual à diferença entre o preço de exercício e o valor atual do estoque, a divulgação do número máximo de ações para as quais podem ser concedidas subvenções a um empregado individual durante um período especificado e o preço de exercício dessas opções (por exemplo, o valor justo de mercado na data da concessão) satisfazem os requisitos deste parágrafo (e) (4) (iv). Nesse caso, os acionistas poderiam calcular o montante máximo de remuneração que seria atribuível ao exercício de opções com base em seus pressupostos quanto ao preço das ações futuras.

(v) Requisitos de divulgação da Securities and Exchange Commission. To the extent not otherwise specifically provided in this paragraph (e)(4), whether the material terms of a performance goal are adequately disclosed to shareholders is determined under the same standards as apply under the Exchange Act.

(vi) Frequency of disclosure. Once the material terms of a performance goal are disclosed to and approved by shareholders, no additional disclosure or approval is required unless the compensation committee changes the material terms of the performance goal. If, however, the compensation committee has authority to change the targets under a performance goal after shareholder approval of the goal, material terms of the performance goal must be disclosed to and reapproved by shareholders no later than the first shareholder meeting that occurs in the fifth year following the year in which shareholders previously approved the performance goal.

(vii) Shareholder vote. For purposes of this paragraph (e)(4), the material terms of a performance goal are approved by shareholders if, in a separate vote, a majority of the votes cast on the issue (including abstentions to the extent abstentions are counted as voting under applicable state law) are cast in favor of approval.

(viii) Members of affiliated group. For purposes of this paragraph (e)(4), the shareholders of the publicly held member of the affiliated group are treated as the shareholders of all members of the affiliated group.

(ix) Examples. This paragraph (e)(4) may be illustrated by the following examples:

(5) Compensation committee certification. The compensation committee must certify in writing prior to payment of the compensation that the performance goals and any other material terms were in fact satisfied. For this purpose, approved minutes of the compensation committee meeting in which the certification is made are treated as a written certification. Certification by the compensation committee is not required for compensation that is attributable solely to the increase in the value of the stock of the publicly held corporation.

(f) Companies that become publicly held, spinoffs, and similar transactions -

(1) In general. In the case of a corporation that was not a publicly held corporation and then becomes a publicly held corporation, the deduction limit of paragraph (b) of this section does not apply to any remuneration paid pursuant to a compensation plan or agreement that existed during the period in which the corporation was not publicly held. However, in the case of such a corporation that becomes publicly held in connection with an initial public offering, this relief applies only to the extent that the prospectus accompanying the initial public offering disclosed information concerning those plans or agreements that satisfied all applicable securities laws then in effect. In accordance with paragraph (c)(1)(ii) of this section, a corporation that is a member of an affiliated group that includes a publicly held corporation is considered publicly held and, therefore, cannot rely on this paragraph (f)(1).

(2) Reliance period. Paragraph (f)(1) of this section may be relied upon until the earliest of -

(i) The expiration of the plan or agreement;

(ii) The material modification of the plan or agreement, within the meaning of paragraph (h)(1)(iii) of this section;

(iii) The issuance of all employer stock and other compensation that has been allocated under the plan; ou.

(iv) The first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the initial public offering occurs or, in the case of a privately held corporation that becomes publicly held without an initial public offering, the first calendar year following the calendar year in which the corporation becomes publicly held.

(3) Stock-based compensation. Paragraph (f)(1) of this section will apply to any compensation received pursuant to the exercise of a stock option or stock appreciation right, or the substantial vesting of restricted property, granted under a plan or agreement described in paragraph (f)(1) of this section if the grant occurs on or before the earliest of the events specified in paragraph (f)(2) of this section. This paragraph does not apply to any form of stock-based compensation other than the forms listed in the immediately preceding sentence. Thus, for example, compensation payable under a restricted stock unit arrangement or a phantom stock arrangement must be paid, rather than merely granted, on or before the occurrence of the earliest of the events specified in paragraph (f)(2) of this section in order for paragraph (f)(1) of this section to apply.

(4) Subsidiaries that become separate publicly held corporations -

(i) In general. If a subsidiary that is a member of the affiliated group described in paragraph (c)(1)(ii) of this section becomes a separate publicly held corporation (whether by spinoff or otherwise), any remuneration paid to covered employees of the new publicly held corporation will satisfy the exception for performance-based compensation described in paragraph (e) of this section if the conditions in either paragraph (f)(4)(ii) or (f)(4)(iii) of this section are satisfied.

(ii) Prior establishment and approval. Remuneration satisfies the requirements of this paragraph (f)(4)(ii) if the remuneration satisfies the requirements for performance-based compensation set forth in paragraphs (e)(2), (e)(3), and (e)(4) of this section (by application of paragraphs (e)(3)(viii) and (e)(4)(viii) of this section) before the corporation becomes a separate publicly held corporation, and the certification required by paragraph (e)(5) of this section is made by the compensation committee of the new publicly held corporation (but if the performance goals are attained before the corporation becomes a separate publicly held corporation, the certification may be made by the compensation committee referred to in paragraph (e)(3)(viii) of this section before it becomes a separate publicly held corporation). Thus, this paragraph (f)(4)(ii) requires that the outside directors and shareholders (within the meaning of paragraphs (e)(3)(viii) and (e)(4)(viii) of this section) of the corporation before it becomes a separate publicly held corporation establish and approve, respectively, the performance-based compensation for the covered employees of the new publicly held corporation in accordance with paragraphs (e)(3) and (e)(4) of this section.

(iii) Transition period. Remuneration satisfies the requirements of this paragraph (f)(4)(iii) if the remuneration satisfies all of the requirements of paragraphs (e)(2), (e)(3), and (e)(5) of this section. The outside directors (within the meaning of paragraph (e)(3)(viii) of this section) of the corporation before it becomes a separate publicly held corporation, or the outside directors of the new publicly held corporation, may establish and administer the performance goals for the covered employees of the new publicly held corporation for purposes of satisfying the requirements of paragraphs (e)(2) and (e)(3) of this section. The certification required by paragraph (e)(5) of this section must be made by the compensation committee of the new publicly held corporation. However, a taxpayer may rely on this paragraph (f)(4)(iii) to satisfy the requirements of paragraph (e) of this section only for compensation paid, or stock options, stock appreciation rights, or restricted property granted, prior to the first regularly scheduled meeting of the shareholders of the new publicly held corporation that occurs more than 12 months after the date the corporation becomes a separate publicly held corporation. Compensation paid, or stock options, stock appreciation rights, or restricted property granted, on or after the date of that meeting of shareholders must satisfy all requirements of paragraph (e) of this section, including the shareholder approval requirement of paragraph (e)(4) of this section, in order to satisfy the requirements for performance-based compensation.

(5) Example. The following example illustrates the application of paragraph (f)(4)(ii) of this section:

(g) Coordination with disallowed excess parachute payments. The $1,000,000 limitation in paragraph (b) of this section is reduced (but not below zero) by the amount (if any) that would have been included in the compensation of the covered employee for the taxable year but for being disallowed by reason of section 280G. For example, assume that during a taxable year a corporation pays $1,500,000 to a covered employee and no portion satisfies the exception in paragraph (d) of this section for commissions or paragraph (e) of this section for qualified performance-based compensation. Of the $1,500,000, $600,000 is an excess parachute payment, as defined in section 280G(b)(1) and is disallowed by reason of that section. Because the excess parachute payment reduces the limitation of paragraph (b) of this section, the corporation can deduct $400,000, and $500,000 of the otherwise deductible amount is nondeductible by reason of section 162(m).

(h) Transition rules -

(1) Compensation payable under a written binding contract which was in effect on February 17, 1993 -

(i) General rule. The deduction limit of paragraph (b) of this section does not apply to any compensation payable under a written binding contract that was in effect on February 17, 1993. The preceding sentence does not apply unless, under applicable state law, the corporation is obligated to pay the compensation if the employee performs services. However, the deduction limit of paragraph (b) of this section does apply to a contract that is renewed after February 17, 1993. A written binding contract that is terminable or cancelable by the corporation after February 17, 1993, without the employee's consent is treated as a new contract as of the date that any such termination or cancellation, if made, would be effective. Thus, for example, if the terms of a contract provide that it will be automatically renewed as of a certain date unless either the corporation or the employee gives notice of termination of the contract at least 30 days before that date, the contract is treated as a new contract as of the date that termination would be effective if that notice were given. Similarly, for example, if the terms of a contract provide that the contract will be terminated or canceled as of a certain date unless either the corporation or the employee elects to renew within 30 days of that date, the contract is treated as renewed by the corporation as of that date. Alternatively, if the corporation will remain legally obligated by the terms of a contract beyond a certain date at the sole discretion of the employee, the contract will not be treated as a new contract as of that date if the employee exercises the discretion to keep the corporation bound to the contract. A contract is not treated as terminable or cancelable if it can be terminated or canceled only by terminating the employment relationship of the employee.

(ii) Compensation payable under a plan or arrangement. If a compensation plan or arrangement meets the requirements of paragraph (h)(1)(i) of this section, the compensation paid to an employee pursuant to the plan or arrangement will not be subject to the deduction limit of paragraph (b) of this section even though the employee was not eligible to participate in the plan as of February 17, 1993. However, the preceding sentence does not apply unless the employee was employed on February 17, 1993, by the corporation that maintained the plan or arrangement, or the employee had the right to participate in the plan or arrangement under a written binding contract as of that date.

(iii) Material modifications.

(A) Paragraph (h)(1)(i) of this section will not apply to any written binding contract that is materially modified. A material modification occurs when the contract is amended to increase the amount of compensation payable to the employee. If a binding written contract is materially modified, it is treated as a new contract entered into as of the date of the material modification. Thus, amounts received by an employee under the contract prior to a material modification are not affected, but amounts received subsequent to the material modification are not treated as paid under a binding, written contract described in paragraph (h)(1)(i) of this section.

(B) A modification of the contract that accelerates the payment of compensation will be treated as a material modification unless the amount of compensation paid is discounted to reasonably reflect the time value of money. If the contract is modified to defer the payment of compensation, any compensation paid in excess of the amount that was originally payable to the employee under the contract will not be treated as a material modification if the additional amount is based on either a reasonable rate of interest or one or more predetermined actual investments (whether or not assets associated with the amount originally owed are actually invested therein) such that the amount payable by the employer at the later date will be based on the actual rate of return of the specific investment (including any decrease as well as any increase in the value of the investment).

(C) The adoption of a supplemental contract or agreement that provides for increased compensation, or the payment of additional compensation, is a material modification of a binding, written contract where the facts and circumstances show that the additional compensation is paid on the basis of substantially the same elements or conditions as the compensation that is otherwise paid under the written binding contract. However, a material modification of a written binding contract does not include a supplemental payment that is equal to or less than a reasonable cost-of-living increase over the payment made in the preceding year under that written binding contract. In addition, a supplemental payment of compensation that satisfies the requirements of qualified performance-based compensation in paragraph (e) of this section will not be treated as a material modification.

(iv) Examples. The following examples illustrate the exception of this paragraph (h)(1):

(2) Special transition rule for outside directors. A director who is a disinterested director is treated as satisfying the requirements of an outside director under paragraph (e)(3) of this section until the first meeting of shareholders at which directors are to be elected that occurs on or after January 1, 1996. For purposes of this paragraph (h)(2) and paragraph (h)(3) of this section, a director is a disinterested director if the director is disinterested within the meaning of Rule 16b-3(c)(2)(i), 17 CFR 240.16b-3(c)(2)(i), under the Exchange Act (including the provisions of Rule 16b-3(d)(3), as in effect on April 30, 1991).

(3) Special transition rule for previously-approved plans - (i) In general. Any compensation paid under a plan or agreement approved by shareholders before December 20, 1993, is treated as satisfying the requirements of paragraphs (e)(3) and (e)(4) of this section, provided that the directors administering the plan or agreement are disinterested directors and the plan was approved by shareholders in a manner consistent with Rule 16b-3(b), 17 CFR 240.16b-3(b), under the Exchange Act or Rule 16b-3(a), 17 CFR 240.16b-3(a) (as contained in 17 CFR part 240 revised April 1, 1990). In addition, for purposes of satisfying the requirements of paragraph (e)(2)(vi) of this section, a plan or agreement is treated as stating a maximum number of shares with respect to which an option or right may be granted to any employee if the plan or agreement that was approved by the shareholders provided for an aggregate limit, consistent with Rule 16b-3(b), 17 CFR 250.16b-3(b), on the shares of employer stock with respect to which awards may be made under the plan or agreement.

(ii) Reliance period. The transition rule provided in this paragraph (h)(3) shall continue and may be relied upon until the earliest of -

(A) The expiration or material modification of the plan or agreement;

(B) The issuance of all employer stock and other compensation that has been allocated under the plan; ou.

(iii) Stock-based compensation. This paragraph (h)(3) will apply to any compensation received pursuant to the exercise of a stock option or stock appreciation right, or the substantial vesting of restricted property, granted under a plan or agreement described in paragraph (h)(3)(i) of this section if the grant occurs on or before the earliest of the events specified in paragraph (h)(3)(ii) of this section.

(iv) Example. The following example illustrates the application of this paragraph (h)(3):

(j) Effective date -

(1) In general. Section 162(m) and this section apply to compensation that is otherwise deductible by the corporation in a taxable year beginning on or after January 1, 1994.

(2) Delayed effective date for certain provisions -

(i) Date on which remuneration is considered paid. Notwithstanding paragraph (j)(1) of this section, the rules in the second sentence of each of paragraphs (e)(3)(ii)(A), (e)(3)(ii)(B), and (e)(3)(ii)(C) of this section for determining the date or dates on which remuneration is considered paid to a director are effective for taxable years beginning on or after January 1, 1995. Prior to those taxable years, taxpayers must follow the rules in paragraphs (e)(3)(ii)(A), (e)(3)(ii)(B), and (e)(3)(ii)(C) of this section or another reasonable, good faith interpretation of section 162(m) with respect to the date or dates on which remuneration is considered paid to a director.

(ii) Separate treatment of publicly held subsidiaries. Notwithstanding paragraph (j)(1) of this section, the rule in paragraph (c)(1)(ii) of this section that treats publicly held subsidiaries as separately subject to section 162(m) is effective as of the first regularly scheduled meeting of the shareholders of the publicly held subsidiary that occurs more than 12 months after December 2, 1994. The rule for stock-based compensation set forth in paragraph (f)(3) of this section will apply for this purpose, except that the grant must occur before the shareholder meeting specified in this paragraph (j)(2)(ii). Taxpayers may choose to rely on the rule referred to in the first sentence of this paragraph (j)(2)(ii) for the period prior to the effective date of the rule.

(iii) Subsidiaries that become separate publicly held corporations. Notwithstanding paragraph (j)(1) of this section, if a subsidiary of a publicly held corporation becomes a separate publicly held corporation as described in paragraph (f)(4)(i) of this section, then, for the duration of the reliance period described in paragraph (f)(2) of this section, the rules of paragraph (f)(1) of this section are treated as applying (and the rules of paragraph (f)(4) of this section do not apply) to remuneration paid to covered employees of that new publicly held corporation pursuant to a plan or agreement that existed prior to December 2, 1994, provided that the treatment of that remuneration as performance-based is in accordance with a reasonable, good faith interpretation of section 162(m). However, if remuneration is paid to covered employees of that new publicly held corporation pursuant to a plan or agreement that existed prior to December 2, 1994, but that remuneration is not performance-based under a reasonable, good faith interpretation of section 162(m), the rules of paragraph (f)(1) of this section will be treated as applying only until the first regularly scheduled meeting of shareholders that occurs more than 12 months after December 2, 1994. The rules of paragraph (f)(4) of this section will apply as of that first regularly scheduled meeting. The rule for stock-based compensation set forth in paragraph (f)(3) of this section will apply for purposes of this paragraph (j)(2)(iii), except that the grant must occur before the shareholder meeting specified in the preceding sentence if the remuneration is not performance-based under a reasonable, good faith interpretation of section 162(m). Taxpayers may choose to rely on the rules of paragraph (f)(4) of this section for the period prior to the applicable effective date referred to in the first or second sentence of this paragraph (j)(2)(iii).

(iv) Bonus pools. Notwithstanding paragraph (j)(1) of this section, the rules in paragraph (e)(2)(iii)(A) that limit the sum of individual percentages of a bonus pool to 100 percent will not apply to remuneration paid before January 1, 2001, based on performance in any performance period that began prior to December 20, 1995.

(v) Compensation based on a percentage of salary or base pay. Notwithstanding paragraph (j)(1) of this section, the requirement in paragraph (e)(4)(i) of this section that, in the case of certain formulas based on a percentage of salary or base pay, a corporation disclose to shareholders the maximum dollar amount of compensation that could be paid to the employee, will apply only to plans approved by shareholders after April 30, 1995.

(vi) The modifications to paragraphs (e)(2)(vi)(A), (e)(2)(vii) Example 9, and (e)(4)(iv) of this section concerning the maximum number of shares with respect to which a stock option or stock appreciation right that may be granted and the amount of compensation that may be paid to any individual employee apply to compensation attributable to stock options and stock appreciation rights that are granted on or after June 24, 2018. The last two sentences of § 1.162-27(f)(3) apply to remuneration that is otherwise deductible resulting from a stock option, stock appreciation right, restricted stock (or other property), restricted stock unit, or any other form of equity-based remuneration that is granted on or after April 1, 2018.

This is a list of United States Code sections, Statutes at Large, Public Laws, and Presidential Documents, which provide rulemaking authority for this CFR Part.

It is not guaranteed to be accurate or up-to-date, though we do refresh the database weekly. More limitations on accuracy are described at the GPO site.

Section 162(m) Pitfalls.

It's proxy season. For public companies that rely on the performance-based compensation exception to the $1 million annual deduction limit under section 162(m) of the Internal Revenue Code (Code), that means it's time to adopt annual and long-term incentive plans, set performance goals, certify attainment of performance goals from prior-year plans, disclose performance targets, and address the deductibility of executive compensation in their annual Compensation Discussion and Analysis disclosures.

We have highlighted below several common compliance pitfalls that can be fatal to qualifying for the section 162(m) performance-based compensation exception. Public companies should review their performance-based compensation arrangements in light of these pitfalls to maximize their tax deduction for compensation paid to their top executives.

Common Section 162(m) Pitfalls.

Permitting payment of performance-based compensation upon retirement, involuntary termination, or termination for good reason . Pursuant to IRS Revenue Ruling 2008-13, compensation payable for performance periods beginning after January 1, 2009 or paid under employment agreements entered into after February 21, 2008 (or that are renewed or extended after that date, including automatic renewals or extensions) will not qualify as performance-based if it may be paid without regard to whether the performance goals are met when the executive retires, is involuntarily terminated without cause, or terminates employment for good reason. This rule applies without regard to whether any of these events actually occur or the performance goals are in fact attained; the mere presence of the provision disqualifies the arrangement.[1] Therefore, companies should review their employment contracts, severance agreements, and other compensation arrangements to see if performance-based arrangements intended to comply with section 162(m) could be payable on retirement, involuntary termination, or termination for good reason.

Allowing directors who are not "outside directors" to serve on the committee authorizing and administering section 162(m) performance-based compensation. To qualify as performance-based compensation, compensation must be awarded and administered by a committee composed solely of two or more "outside directors." "Outside directors" are defined as directors who are not former employees or current or former officers (including directors who acted as interim officers depending on the circumstances)[2] and who generally do not receive remuneration other than director compensation from the corporation. Satisfying the NYSE or NASDAQ requirements for independent directors or the SEC requirements for nonemployee directors under Rule 16b-3 (while generally mandatory) is not sufficient-the section 162(m) requirements are different (and can be more restrictive).

Using a performance goal that is not based on the business criteria approved by shareholders. Compensation other than stock options and stock appreciation rights (SARs) granted with an exercise price at least equal to grant date fair market value will qualify as performance-based compensation only if it is paid solely on the attainment of one or more pre-established, objective performance goals, based upon business criteria approved by shareholders. The compensation committee may not deviate from the business criteria listed in the shareholder-approved plan. These criteria need not be specific as to the exact targets being used. For example, the plan need not be so specific as to provide that the performance goal is a 10% increase in earnings per share. Rather, the plan need only provide that the performance goal may be based on earnings per share. However, pursuant to the SEC's compensation proxy disclosure requirements, a company must annually disclose and analyze the specific performance criteria and targets in its Compensation Discussion and Analysis unless the disclosure involves confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm to the company.

Failing to obtain shareholder reapproval of business criteria upon which performance goals are based. The specific targets that must be satisfied under a performance goal need not be approved by shareholders. However, if the compensation committee has the authority to change the targets under a performance goal from year to year after shareholders have approved the business criteria upon which performance goals are based, the business criteria must be disclosed to and re-approved by shareholders at least every five years. Therefore, if shareholders last approved the business criteria in a plan in 2005, the business criteria should be submitted to shareholders for reapproval in 2018. The material terms of the performance goals that must be reapproved include (1) the class of eligible employees, (2) the types of business criteria on which the payouts or vesting for performance-based awards are based, and (3) the maximum amounts of cash or shares that can be provided during a specified period to any employee for performance-based awards under the plan.

Failing to establish the performance goals on a timely basis or making changes to the performance goals or targets. The performance goals must be established in writing no later than 90 days after the beginning of the service period to which the performance goals relate (or before 25% of such service period has elapsed) and at a time when the outcome is substantially uncertain. For calendar-year service (and performance) periods, this means that the performance goals for an annual plan must be established by March 31, 2018. The performance goals cannot be changed after this initial period.

Paying compensation when the performance goals were not attained. To qualify as performance-based compensation, compensation must be paid solely on the attainment of one or more objective performance goals. In the current economic environment, many companies did not attain their performance goals and may be considering paying their executives discretionary bonuses for their efforts in 2009. A word of caution: a discretionary bonus would not qualify for the performance-based exception, and could also jeopardize the performance-based exception for prior or future bonuses, if the facts and circumstances indicate that performance-based compensation is paid regardless of performance. On the flip side, compensation payable on account of attaining the performance goal must not exceed the limit that was approved by shareholders, and the plan should not provide the compensation committee discretion to pay more than the authorized amount.

Adjusting bonus amounts for subsequent events if such an adjustment is not included in the performance goal formula. To qualify as performance-based, compensation must be payable under an objective formula for computing the amount payable if a certain goal is attained. It is possible to adjust performance measures for certain objective subsequent events (for example , reorganization and restructuring programs or other executive termination costs, integration and other one-time expenditures, the sale or acquisition of a business unit); however, this feature must be included in the performance goal formula when it is initially established, and cannot be added at the end of the performance period. If unanticipated circumstances arise, the compensation committee can use its discretion to reduce the payout to the desired level based on the circumstances, but the payment cannot be increased to disregard the impact of subsequent events if no adjustment mechanism is present.

Increasing the amount of compensation that would otherwise be due upon attainment of the performance goals. Compensation will not qualify as performance-based if the compensation committee has discretion to increase the amount payable upon attainment of the performance goals. However, the committee may have discretion to reduce the payment.

Paying awards or bonuses without compensation committee certification that the performance goals were satisfied. Compensation committees must certify that the performance goals have been met in order for amounts paid upon attainment of those goals to be deductible under section 162(m). This applies to any bonuses or awards, including the vesting of equity awards based on performance. This certification should be included in the compensation committee minutes.

Misstating or omitting required terms that must be approved by shareholders for compensation to qualify as performance-based. The material terms that must be approved by shareholders include the maximum amount of compensation that could be paid to any employee or the formula used to calculate the amount of compensation to be paid to individual employees if certain performance goals are attained, the employees eligible to receive the compensation, and a description of the business criteria on which the performance goals are based. The description of the compensation payable must be specific enough so that shareholders can determine the maximum amount that could be paid to any employee during a specified period. With respect to options and SARs, the plan must state the maximum number of shares with respect to which options or SARs may be granted during a specified period to any employee.

Granting stock options or SARs in excess of the plan's limit or the amount that can be awarded to an individual in a specified time period. Stock options and SARs must be granted under a shareholder-approved plan that contains a limit on the maximum number of options or SARs that may be granted to any employee in a specified period and the exercise price.

Allowing inside directors to participate in granting stock options or SARs . Stock options and SARs must be granted by "outside directors" in accordance with a shareholder-approved plan in order to qualify as performance-based compensation under section 162(m).

Granting discounted stock options or SARs. The exercise price (or measurement) of stock options and SARs intended to qualify with section 162(m) (and to be exempt from Code section 409A) must not be less than the fair market value of the underlying stock on the grant date-the amount of the compensation that the employee can receive must be based solely on an increase in the value of the stock after the grant date. A recent IRS generic Legal Advice Memorandum, dated July 6, 2009, emphasizes that discounted stock options or SARs can never qualify as performance-based compensation under section 162(m) and states that discounted options and SARs cannot be cured for purposes of qualifying as performance-based compensation under section 162(m).

Not contemporaneously documenting stock option and SAR grants or failing to document grants altogether. Even though the section 162(m) regulations do not require formal committee meetings to grant options or SARs or even prompt documentation of those grants, on audit the IRS has taken the position that options are discounted (and thus do not qualify as performance-based compensation under section 162(m)) when grants are documented weeks after the grant date using "as of" grant dates or unanimous written consents (UWCs), when there is no contemporaneous documentation of compensation committee meetings or when there are only oral authorizations from the board or the compensation committee. In the event that the IRS determines that it is not possible to determine the grant date, the IRS will use the financial accounting measurement date as a proxy for the grant date. To avoid this challenge, the compensation committee should be precise about when an option or SAR is granted and complete all corporate documentation in a timely manner, for example, by preparing, signing, and dating the committee minutes or UWCs at the committee meeting, or within a day or two after the meeting or after the decision is made to grant options or SARs. This also raises a question about "best practices" for granting equity compensation.

Granting stock options or SARs or paying other compensation under a plan that was not approved by shareholders.

Materially amending a plan without shareholder approval.

For companies having an IPO, failing to obtain shareholder approval of a pre-IPO plan before the first shareholders meeting following the end of the third calendar year after the IPO.

Accelerating the payment date of performance-based compensation without reducing the payment amount to reflect the time value of money.

Companies can mitigate the adverse effect of failing to comply with section 162(m) by requiring deferrals of any amounts that would not be deductible by the company to a date after the employee's termination of employment. Forcing executives to assume the credit risk in difficult economic times may be met with resistance, however. Also, keep in mind that any such deferral must be made in accordance with section 409A.

Companies should consider instituting clawback policies with respect to performance-based compensation. A clawback policy allows the company to recover compensation if subsequent review indicates that payments were not calculated accurately or performance goals were not met.

If you have any questions or would like more information on any of the issues discussed in this Hot Topics alert, please contact any of the following Morgan Lewis attorneys:

[1] Compensation may qualify as performance-based even if the plan allows the compensation to be payable upon death, disability, or change of ownership or control without attainment of the performance goals. The regulations also warn that compensation actually paid on account of those events would not qualify as performance-based. However, separate exceptions generally ensure a deduction for such payments, since the payees (after the death or disability of an executive) or the payor (in the event of a change in control) are likely exempt from section 162(m) in any event.

[2] Whether a director who serves as an interim officer qualifies as "outside director" depends on the facts and circumstances. In Revenue Ruling 2008-32, the IRS concluded that a director did not qualify as an "outside director" based on the following facts: (1) the company employed the director for an indefinite period of time to serve as interim CEO with the full authority invested in that office; (2) the director was in regular and continuous service for nearly a year; (3) the director was not employed for a special or single transaction; and (4) the director did not merely have the title of "officer." However, under case law long predating section 162(m), absent one or more of these cited conditions, an "interim officer" may not necessarily meet the definition of "officer," and thus may still qualify as an "outside director."

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162(m) stock options.

Keyword Title Author Topic. Stock option plan amendment not material for sec. Retrieved Jun 23 from https: The IRS has ruled in Letter Ruling that an amendment to a stock option plan that allows participants to transfer their stock options 162(m) family members is stock a material modification for Sec. The letter ruling was based on the proposed regulations to Sec. Letter Ruling Stock company maintains a performance-based compensation plan under which stock options are granted to its executive management. The stock options are not transferable by participants except by will or the laws of descent and distribution, and are exercisable during the participant's lifetime only by the participant. The 162(m) was approved by options company's shareholders before Dec. To facilitate estate planning for 162(m) nearing options, the company proposed to amend the plan to permit participants to transfer stock options to any member of the participant's immediate family or to a trust established for the exclusive benefit of one or more members of the options immediate family. The transferees will enjoy the same 162(m) as the participant, except they will be unable to transfer the stock options except by will or the laws of descent and distribution. In addition, stock options granted under the plan on or before Jan. Since the 162(m) establishment, the requirements of Prop. COPYRIGHT American Institute of CPA's No portion of this article can be reproduced without the express written permission from the copyright holder. CopyrightGale Group. Gale Group is a Thomson Corporation Company. The Tax Adviser Date: Jun stock, Words: Planning opportunity for certain "J" visa holders. Laws, regulations and rules. Employee stock options Laws, regulations and rules Estate planning Options, regulations and rules Executive compensation Executives Compensation and benefits. Proposed Section m regulations on deductions for executive compensation. Current developments in employee benefits. An overview of options developments in stock benefits. IRS uncovers significant noncompliance with sec. Deferred compensation for executives under sec. A-D E-O P-T U-Z.

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26 CFR 1.162-27 - Certain employee remuneration in excess of $1,000,000.

(a) Scope. This section provides rules for the application of the $1 million deduction limit under section 162(m) of the Internal Revenue Code. Paragraph (b) of this section provides the general rule limiting deductions under section 162(m). Paragraph (c) of this section provides definitions of generally applicable terms. Paragraph (d) of this section provides an exception from the deduction limit for compensation payable on a commission basis. Paragraph (e) of this section provides an exception for qualified performance-based compensation. Paragraphs (f) and (g) of this section provide special rules for corporations that become publicly held corporations and payments that are subject to section 280G, respectively. Paragraph (h) of this section provides transition rules, including the rules for contracts that are grandfathered and not subject to section 162(m). Paragraph (j) of this section contains the effective date provisions. For rules concerning the deductibility of compensation for services that are not covered by section 162(m) and this section, see section 162(a)(1) and § 1.162-7. This section is not determinative as to whether compensation meets the requirements of section 162(a)(1).

(b) Limitation on deduction. Section 162(m) precludes a deduction under chapter 1 of the Internal Revenue Code by any publicly held corporation for compensation paid to any covered employee to the extent that the compensation for the taxable year exceeds $1,000,000.

(1) Publicly held corporation -

(i) General rule. A publicly held corporation means any corporation issuing any class of common equity securities required to be registered under section 12 of the Exchange Act. A corporation is not considered publicly held if the registration of its equity securities is voluntary. For purposes of this section, whether a corporation is publicly held is determined based solely on whether, as of the last day of its taxable year, the corporation is subject to the reporting obligations of section 12 of the Exchange Act.

(ii) Affiliated groups. A publicly held corporation includes an affiliated group of corporations, as defined in section 1504 (determined without regard to section 1504(b)). For purposes of this section, however, an affiliated group of corporations does not include any subsidiary that is itself a publicly held corporation. Such a publicly held subsidiary, and its subsidiaries (if any), are separately subject to this section. If a covered employee is paid compensation in a taxable year by more than one member of an affiliated group, compensation paid by each member of the affiliated group is aggregated with compensation paid to the covered employee by all other members of the group. Any amount disallowed as a deduction by this section must be prorated among the payor corporations in proportion to the amount of compensation paid to the covered employee by each such corporation in the taxable year.

(2) Covered employee -

(i) General rule. A covered employee means any individual who, on the last day of the taxable year, is -

(A) The chief executive officer of the corporation or is acting in such capacity; ou.

(B) Among the four highest compensated officers (other than the chief executive officer).

(ii) Application of rules of the Securities and Exchange Commission. Whether an individual is the chief executive officer described in paragraph (c)(2)(i)(A) of this section or an officer described in paragraph (c)(2)(i)(B) of this section is determined pursuant to the executive compensation disclosure rules under the Exchange Act.

(i) In general. For purposes of the deduction limitation described in paragraph (b) of this section, compensation means the aggregate amount allowable as a deduction under chapter 1 of the Internal Revenue Code for the taxable year (determined without regard to section 162(m)) for remuneration for services performed by a covered employee, whether or not the services were performed during the taxable year.

(ii) Exceptions. Compensation does not include -

(A) Remuneration covered in section 3121(a)(5)(A) through section 3121(a)(5)(D) (concerning remuneration that is not treated as wages for purposes of the Federal Insurance Contributions Act); and.

(B) Remuneration consisting of any benefit provided to or on behalf of an employee if, at the time the benefit is provided, it is reasonable to believe that the employee will be able to exclude it from gross income. In addition, compensation does not include salary reduction contributions described in section 3121(v)(1).

(4) Compensation Committee. The compensation committee means the committee of directors (including any subcommittee of directors) of the publicly held corporation that has the authority to establish and administer performance goals described in paragraph (e)(2) of this section, and to certify that performance goals are attained, as described in paragraph (e)(5) of this section. A committee of directors is not treated as failing to have the authority to establish performance goals merely because the goals are ratified by the board of directors of the publicly held corporation or, if applicable, any other committee of the board of directors. See paragraph (e)(3) of this section for rules concerning the composition of the compensation committee.

(5) Exchange Act. The Exchange Act means the Securities Exchange Act of 1934.

(6) Examples. This paragraph (c) may be illustrated by the following examples:

(d) Exception for compensation paid on a commission basis. The deduction limit in paragraph (b) of this section shall not apply to any compensation paid on a commission basis. For this purpose, compensation is paid on a commission basis if the facts and circumstances show that it is paid solely on account of income generated directly by the individual performance of the individual to whom the compensation is paid. Compensation does not fail to be attributable directly to the individual merely because support services, such as secretarial or research services, are utilized in generating the income. However, if compensation is paid on account of broader performance standards, such as income produced by a business unit of the corporation, the compensation does not qualify for the exception provided under this paragraph (d).

(e) Exception for qualified performance-based compensation -

(1) In general. The deduction limit in paragraph (b) of this section does not apply to qualified performance-based compensation. Qualified performance-based compensation is compensation that meets all of the requirements of paragraphs (e)(2) through (e)(5) of this section.

(2) Performance goal requirement -

(i) Preestablished goal. Qualified performance-based compensation must be paid solely on account of the attainment of one or more preestablished, objective performance goals. A performance goal is considered preestablished if it is established in writing by the compensation committee not later than 90 days after the commencement of the period of service to which the performance goal relates, provided that the outcome is substantially uncertain at the time the compensation committee actually establishes the goal. However, in no event will a performance goal be considered to be preestablished if it is established after 25 percent of the period of service (as scheduled in good faith at the time the goal is established) has elapsed. A performance goal is objective if a third party having knowledge of the relevant facts could determine whether the goal is met. Performance goals can be based on one or more business criteria that apply to the individual, a business unit, or the corporation as a whole. Such business criteria could include, for example, stock price, market share, sales, earnings per share, return on equity, or costs. A performance goal need not, however, be based upon an increase or positive result under a business criterion and could include, for example, maintaining the status quo or limiting economic losses (measured, in each case, by reference to a specific business criterion). A performance goal does not include the mere continued employment of the covered employee. Thus, a vesting provision based solely on continued employment would not constitute a performance goal. See paragraph (e)(2)(vi) of this section for rules on compensation that is based on an increase in the price of stock.

(ii) Objective compensation formula. A preestablished performance goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the employee if the goal is attained. A formula or standard is objective if a third party having knowledge of the relevant performance results could calculate the amount to be paid to the employee. In addition, a formula or standard must specify the individual employees or class of employees to which it applies.

(A) The terms of an objective formula or standard must preclude discretion to increase the amount of compensation payable that would otherwise be due upon attainment of the goal. A performance goal is not discretionary for purposes of this paragraph (e)(2)(iii) merely because the compensation committee reduces or eliminates the compensation or other economic benefit that was due upon attainment of the goal. However, the exercise of negative discretion with respect to one employee is not permitted to result in an increase in the amount payable to another employee. Thus, for example, in the case of a bonus pool, if the amount payable to each employee is stated in terms of a percentage of the pool, the sum of these individual percentages of the pool is not permitted to exceed 100 percent. If the terms of an objective formula or standard fail to preclude discretion to increase the amount of compensation merely because the amount of compensation to be paid upon attainment of the performance goal is based, in whole or in part, on a percentage of salary or base pay and the dollar amount of the salary or base pay is not fixed at the time the performance goal is established, then the objective formula or standard will not be considered discretionary for purposes of this paragraph (e)(2)(iii) if the maximum dollar amount to be paid is fixed at that time.

(B) If compensation is payable upon or after the attainment of a performance goal, and a change is made to accelerate the payment of compensation to an earlier date after the attainment of the goal, the change will be treated as an increase in the amount of compensation, unless the amount of compensation paid is discounted to reasonably reflect the time value of money. If compensation is payable upon or after the attainment of a performance goal, and a change is made to defer the payment of compensation to a later date, any amount paid in excess of the amount that was originally owed to the employee will not be treated as an increase in the amount of compensation if the additional amount is based either on a reasonable rate of interest or on one or more predetermined actual investments (whether or not assets associated with the amount originally owed are actually invested therein) such that the amount payable by the employer at the later date will be based on the actual rate of return of a specific investment (including any decrease as well as any increase in the value of an investment). If compensation is payable in the form of property, a change in the timing of the transfer of that property after the attainment of the goal will not be treated as an increase in the amount of compensation for purposes of this paragraph (e)(2)(iii). Thus, for example, if the terms of a stock grant provide for stock to be transferred after the attainment of a performance goal and the transfer of the stock also is subject to a vesting schedule, a change in the vesting schedule that either accelerates or defers the transfer of stock will not be treated as an increase in the amount of compensation payable under the performance goal.

(C) Compensation attributable to a stock option, stock appreciation right, or other stock-based compensation does not fail to satisfy the requirements of this paragraph (e)(2) to the extent that a change in the grant or award is made to reflect a change in corporate capitalization, such as a stock split or dividend, or a corporate transaction, such as any merger of a corporation into another corporation, any consolidation of two or more corporations into another corporation, any separation of a corporation (including a spinoff or other distribution of stock or property by a corporation), any reorganization of a corporation (whether or not such reorganization comes within the definition of such term in section 368), or any partial or complete liquidation by a corporation.

(iv) Grant-by-grant determination. The determination of whether compensation satisfies the requirements of this paragraph (e)(2) generally shall be made on a grant-by-grant basis. Thus, for example, whether compensation attributable to a stock option grant satisfies the requirements of this paragraph (e)(2) generally is determined on the basis of the particular grant made and without regard to the terms of any other option grant, or other grant of compensation, to the same or another employee. As a further example, except as provided in paragraph (e)(2)(vi), whether a grant of restricted stock or other stock-based compensation satisfies the requirements of this paragraph (e)(2) is determined without regard to whether dividends, dividend equivalents, or other similar distributions with respect to stock, on such stock-based compensation are payable prior to the attainment of the performance goal. Dividends, dividend equivalents, or other similar distributions with respect to stock that are treated as separate grants under this paragraph (e)(2)(iv) are not performance-based compensation unless they separately satisfy the requirements of this paragraph (e)(2).

(v) Compensation contingent upon attainment of performance goal. Compensation does not satisfy the requirements of this paragraph (e)(2) if the facts and circumstances indicate that the employee would receive all or part of the compensation regardless of whether the performance goal is attained. Thus, if the payment of compensation under a grant or award is only nominally or partially contingent on attaining a performance goal, none of the compensation payable under the grant or award will be considered performance-based. For example, if an employee is entitled to a bonus under either of two arrangements, where payment under a nonperformance-based arrangement is contingent upon the failure to attain the performance goals under an otherwise performance-based arrangement, then neither arrangement provides for compensation that satisfies the requirements of this paragraph (e)(2). Compensation does not fail to be qualified performance-based compensation merely because the plan allows the compensation to be payable upon death, disability, or change of ownership or control, although compensation actually paid on account of those events prior to the attainment of the performance goal would not satisfy the requirements of this paragraph (e)(2). As an exception to the general rule set forth in the first sentence of paragraph (e)(2)(iv) of this section, the facts-and-circumstances determination referred to in the first sentence of this paragraph (e)(2)(v) is made taking into account all plans, arrangements, and agreements that provide for compensation to the employee.

(vi) Application of requirements to stock options and stock appreciation rights -

(A) In general. Compensation attributable to a stock option or a stock appreciation right is deemed to satisfy the requirements of this paragraph (e)(2) if the grant or award is made by the compensation committee; the plan under which the option or right is granted states the maximum number of shares with respect to which options or rights may be granted during a specified period to any individual employee; and, under the terms of the option or right, the amount of compensation the employee may receive is based solely on an increase in the value of the stock after the date of the grant or award. A plan may satisfy the requirement to provide a maximum number of shares with respect to which stock options and stock appreciation rights may be granted to any individual employee during a specified period if the plan specifies an aggregate maximum number of shares with respect to which stock options, stock appreciation rights, restricted stock, restricted stock units and other equity-based awards that may be granted to any individual employee during a specified period under a plan approved by shareholders in accordance with § 1.162-27(e)(4). If the amount of compensation the employee may receive under the grant or award is not based solely on an increase in the value of the stock after the date of grant or award (for example, in the case of restricted stock, or an option that is granted with an exercise price that is less than the fair market value of the stock as of the date of grant), none of the compensation attributable to the grant or award is qualified performance-based compensation under this paragraph (e)(2)(vi)(A). Whether a stock option grant is based solely on an increase in the value of the stock after the date of grant is determined without regard to any dividend equivalent that may be payable, provided that payment of the dividend equivalent is not made contingent on the exercise of the option. The rule that the compensation attributable to a stock option or stock appreciation right must be based solely on an increase in the value of the stock after the date of grant or award does not apply if the grant or award is made on account of, or if the vesting or exercisability of the grant or award is contingent on, the attainment of a performance goal that satisfies the requirements of this paragraph (e)(2).

(B) Cancellation and repricing. Compensation attributable to a stock option or stock appreciation right does not satisfy the requirements of this paragraph (e)(2) to the extent that the number of options granted exceeds the maximum number of shares for which options may be granted to the employee as specified in the plan. If an option is canceled, the canceled option continues to be counted against the maximum number of shares for which options may be granted to the employee under the plan. If, after grant, the exercise price of an option is reduced, the transaction is treated as a cancellation of the option and a grant of a new option. In such case, both the option that is deemed to be canceled and the option that is deemed to be granted reduce the maximum number of shares for which options may be granted to the employee under the plan. This paragraph (e)(2)(vi)(B) also applies in the case of a stock appreciation right where, after the award is made, the base amount on which stock appreciation is calculated is reduced to reflect a reduction in the fair market value of stock.

(vii) Examples. This paragraph (e)(2) may be illustrated by the following examples:

(3) Outside directors -

(i) General rule. The performance goal under which compensation is paid must be established by a compensation committee comprised solely of two or more outside directors. A director is an outside director if the director -

(A) Is not a current employee of the publicly held corporation;

(B) Is not a former employee of the publicly held corporation who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year;

(D) Does not receive remuneration from the publicly held corporation, either directly or indirectly, in any capacity other than as a director. For this purpose, remuneration includes any payment in exchange for goods or services.

(ii) Remuneration received. For purposes of this paragraph (e)(3), remuneration is received, directly or indirectly, by a director in each of the following circumstances:

(A) If remuneration is paid, directly or indirectly, to the director personally or to an entity in which the director has a beneficial ownership interest of greater than 50 percent. For this purpose, remuneration is considered paid when actually paid (and throughout the remainder of that taxable year of the corporation) and, if earlier, throughout the period when a contract or agreement to pay remuneration is outstanding.

(B) If remuneration, other than de minimis remuneration, was paid by the publicly held corporation in its preceding taxable year to an entity in which the director has a beneficial ownership interest of at least 5 percent but not more than 50 percent. For this purpose, remuneration is considered paid when actually paid or, if earlier, when the publicly held corporation becomes liable to pay it.

(C) If remuneration, other than de minimis remuneration, was paid by the publicly held corporation in its preceding taxable year to an entity by which the director is employed or self-employed other than as a director. For this purpose, remuneration is considered paid when actually paid or, if earlier, when the publicly held corporation becomes liable to pay it.

(iii) De minimis remuneration -

(A) In general. For purposes of paragraphs (e)(3)(ii)(B) and (C) of this section, remuneration that was paid by the publicly held corporation in its preceding taxable year to an entity is de minimis if payments to the entity did not exceed 5 percent of the gross revenue of the entity for its taxable year ending with or within that preceding taxable year of the publicly held corporation.

(B) Remuneration for personal services and substantial owners. Notwithstanding paragraph (e)(3)(iii)(A) of this section, remuneration in excess of $60,000 is not de minimis if the remuneration is paid to an entity described in paragraph (e)(3)(ii)(B) of this section, or is paid for personal services to an entity described in paragraph (e)(3)(ii)(C) of this section.

(iv) Remuneration for personal services. For purposes of paragraph (e)(3)(iii)(B) of this section, remuneration from a publicly held corporation is for personal services if -

(A) The remuneration is paid to an entity for personal or professional services, consisting of legal, accounting, investment banking, and management consulting services (and other similar services that may be specified by the Commissioner in revenue rulings, notices, or other guidance published in the Internal Revenue Bulletin), performed for the publicly held corporation, and the remuneration is not for services that are incidental to the purchase of goods or to the purchase of services that are not personal services; and.

(B) The director performs significant services (whether or not as an employee) for the corporation, division, or similar organization (within the entity) that actually provides the services described in paragraph (e)(3)(iv)(A) of this section to the publicly held corporation, or more than 50 percent of the entity's gross revenues (for the entity's preceding taxable year) are derived from that corporation, subsidiary, or similar organization.

(v) Entity defined. For purposes of this paragraph (e)(3), entity means an organization that is a sole proprietorship, trust, estate, partnership, or corporation. The term also includes an affiliated group of corporations as defined in section 1504 (determined without regard to section 1504(b)) and a group of organizations that would be an affiliated group but for the fact that one or more of the organizations are not incorporated. However, the aggregation rules referred to in the preceding sentence do not apply for purposes of determining whether a director has a beneficial ownership interest of at least 5 percent or greater than 50 percent.

(vi) Employees and former officers. Whether a director is an employee or a former officer is determined on the basis of the facts at the time that the individual is serving as a director on the compensation committee. Thus, a director is not precluded from being an outside director solely because the director is a former officer of a corporation that previously was an affiliated corporation of the publicly held corporation. For example, a director of a parent corporation of an affiliated group is not precluded from being an outside director solely because that director is a former officer of an affiliated subsidiary that was spun off or liquidated. However, an outside director would no longer be an outside director if a corporation in which the director was previously an officer became an affiliated corporation of the publicly held corporation.

(vii) Officer. Solely for purposes of this paragraph (e)(3), officer means an administrative executive who is or was in regular and continued service. The term implies continuity of service and excludes those employed for a special and single transaction. An individual who merely has (or had) the title of officer but not the authority of an officer is not considered an officer. The determination of whether an individual is or was an officer is based on all of the facts and circumstances in the particular case, including without limitation the source of the individual's authority, the term for which the individual is elected or appointed, and the nature and extent of the individual's duties.

(viii) Members of affiliated groups. For purposes of this paragraph (e)(3), the outside directors of the publicly held member of an affiliated group are treated as the outside directors of all members of the affiliated group.

(ix) Examples. This paragraph (e)(3) may be illustrated by the following examples:

(ii) Thus, in 1998, 1999, and 2000, remuneration is considered paid by Corporation W indirectly to C personally under paragraph (e)(3)(ii)(A) of this section. Accordingly, in 1998, 1999, and 2000, C is not an outside director of Corporation W. The result would have been the same if Corporation W had obtained appropriate representations but nevertheless had reason to believe that it was paying remuneration indirectly to C personally.

(4) Shareholder approval requirement -

(i) General rule. The material terms of the performance goal under which the compensation is to be paid must be disclosed to and subsequently approved by the shareholders of the publicly held corporation before the compensation is paid. The requirements of this paragraph (e)(4) are not satisfied if the compensation would be paid regardless of whether the material terms are approved by shareholders. The material terms include the employees eligible to receive compensation; a description of the business criteria on which the performance goal is based; and either the maximum amount of compensation that could be paid to any employee or the formula used to calculate the amount of compensation to be paid to the employee if the performance goal is attained (except that, in the case of a formula based, in whole or in part, on a percentage of salary or base pay, the maximum dollar amount of compensation that could be paid to the employee must be disclosed).

(ii) Eligible employees. Disclosure of the employees eligible to receive compensation need not be so specific as to identify the particular individuals by name. A general description of the class of eligible employees by title or class is sufficient, such as the chief executive officer and vice presidents, or all salaried employees, all executive officers, or all key employees.

(iii) Description of business criteria -

(A) In general. Disclosure of the business criteria on which the performance goal is based need not include the specific targets that must be satisfied under the performance goal. For example, if a bonus plan provides that a bonus will be paid if earnings per share increase by 10 percent, the 10-percent figure is a target that need not be disclosed to shareholders. However, in that case, disclosure must be made that the bonus plan is based on an earnings-per-share business criterion. In the case of a plan under which employees may be granted stock options or stock appreciation rights, no specific description of the business criteria is required if the grants or awards are based on a stock price that is no less than current fair market value.

(B) Disclosure of confidential information. The requirements of this paragraph (e)(4) may be satisfied even though information that otherwise would be a material term of a performance goal is not disclosed to shareholders, provided that the compensation committee determines that the information is confidential commercial or business information, the disclosure of which would have an adverse effect on the publicly held corporation. Whether disclosure would adversely affect the corporation is determined on the basis of the facts and circumstances. If the compensation committee makes such a determination, the disclosure to shareholders must state the compensation committee's belief that the information is confidential commercial or business information, the disclosure of which would adversely affect the company. In addition, the ability not to disclose confidential information does not eliminate the requirement that disclosure be made of the maximum amount of compensation that is payable to an individual under a performance goal. Confidential information does not include the identity of an executive or the class of executives to which a performance goal applies or the amount of compensation that is payable if the goal is satisfied.

(iv) Description of compensation. Disclosure as to the compensation payable under a performance goal must be specific enough so that shareholders can determine the maximum amount of compensation that could be paid to any individual employee during a specified period. If the terms of the performance goal do not provide for a maximum dollar amount, the disclosure must include the formula under which the compensation would be calculated. Thus, if compensation attributable to the exercise of stock options is equal to the difference between the exercise price and the current value of the stock, then disclosure of the maximum number of shares for which grants may be made to any individual employee during a specified period and the exercise price of those options (for example, fair market value on date of grant) would satisfy the requirements of this paragraph (e)(4)(iv). In that case, shareholders could calculate the maximum amount of compensation that would be attributable to the exercise of options on the basis of their assumptions as to the future stock price.

(v) Disclosure requirements of the Securities and Exchange Commission. To the extent not otherwise specifically provided in this paragraph (e)(4), whether the material terms of a performance goal are adequately disclosed to shareholders is determined under the same standards as apply under the Exchange Act.

(ix) Examples. This paragraph (e)(4) may be illustrated by the following examples:

(f) Companies that become publicly held, spinoffs, and similar transactions -

(2) Reliance period. Paragraph (f)(1) of this section may be relied upon until the earliest of -

(i) The expiration of the plan or agreement;

(ii) The material modification of the plan or agreement, within the meaning of paragraph (h)(1)(iii) of this section;

(iii) The issuance of all employer stock and other compensation that has been allocated under the plan; ou.

(4) Subsidiaries that become separate publicly held corporations -

(5) Example. The following example illustrates the application of paragraph (f)(4)(ii) of this section:

(h) Transition rules -

(1) Compensation payable under a written binding contract which was in effect on February 17, 1993 -

(iii) Material modifications.

(iv) Examples. The following examples illustrate the exception of this paragraph (h)(1):

(ii) Reliance period. The transition rule provided in this paragraph (h)(3) shall continue and may be relied upon until the earliest of -

(A) The expiration or material modification of the plan or agreement;

(B) The issuance of all employer stock and other compensation that has been allocated under the plan; ou.

(iv) Example. The following example illustrates the application of this paragraph (h)(3):

(j) Effective date -

(1) In general. Section 162(m) and this section apply to compensation that is otherwise deductible by the corporation in a taxable year beginning on or after January 1, 1994.

(2) Delayed effective date for certain provisions -

This is a list of United States Code sections, Statutes at Large, Public Laws, and Presidential Documents, which provide rulemaking authority for this CFR Part.

It is not guaranteed to be accurate or up-to-date, though we do refresh the database weekly. More limitations on accuracy are described at the GPO site.

Taxes and executive compensation.

Briefing Paper #344.

The topic of executive compensation has long been of interest to academics, the popular press, and politicians. With the continued increase in executive compensation and resultant increase in pay disparity between those executives and the average worker, this issue is once again coming to the forefront of the public policy debate. Over the years, lawmakers have tweaked the tax code to limit disfavored forms of executive compensation, while regulators have increased the amount of disclosure companies must make. In the current Congress, Rep. Barbara Lee (D-Calif.) has introduced the Income Equity Act of 2018 (H. R. 382), which would amend the Internal Revenue Code to prohibit deductions for excessive compensation for any full-time employee; compensation is defined as “excessive” if it exceeds either $500,000 or 25 times the compensation of the lowest-paid employee, whichever is larger.

The objective of this study is to examine the impact of a prior limitation on deductibility of compensation, Internal Revenue Code Section 162(m). In contrast to much of the debate today on the need of the federal government to raise tax revenue, the primary goal of Section 162(m), which limited tax deductions for executive compensation, was not to raise revenue but to reduce excessive, non-performance-based compensation—in other words, to do something about excessive compensation that 1992 presidential candidate William Jefferson Clinton campaigned against. This paper will review the effectiveness of that provision in achieving its goals, and provide information on how much revenue it has raised or lost due to deductions for executive compensation. With respect to reducing excessive, non-performance-based compensation, many consider Section 162(m) a failure, including Christopher Cox, the then-chairman of the Securities and Exchange Commission, who went so far as to suggest it belonged “in the museum of unintended consequences.” Sen. Charles Grassley (R-Iowa), the then-chair of the Senate Committee on Finance, was even more direct, saying:

162(m) is broken. … It was well-intentioned. But it really hasn’t worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule.

Since Section 162(m) passed nearly 20 years ago, both academic and practitioner research has shown a dramatic increase in executive compensation, with little evidence that it is more closely tied to performance than before. In this paper, we estimate that corporate deductions for executive compensation have been limited by this provision, with public corporations paying, on average, an extra $2.5 billion per year in federal taxes. They continue, however, to deduct the majority of their executive compensation, with these deductions costing the U. S. Treasury an estimated $7.5 billion per year. Because actual tax return data are, by statute, confidential, our estimates are somewhat imprecise, as we have to infer both the tax deductibility of executive compensation and the corporation’s tax status from public filings.

Our key findings are:

Companies are allowed to fully deduct components of executive compensation that meet the IRS requirements to qualify as “performance-based.” One of those requirements is shareholder approval. However, only very general information is provided to shareholders. Therefore, shareholders are asked to, and usually do, approve plans without knowing whether the performance conditions are challenging or not, and the potential payouts from the plan. Performance pay, such as stock options and non-equity incentive plans, that meets the IRS requirements for the “performance-based” exception is fully deductible. Salary, bonuses, and stock grants are deductible but subject to a limit of $1 million. In 2018 our estimate was that there was $27.8 billion of executive compensation that was deductible. A total of $121.5 billion in executive compensation was deductible over the 2007–2018 period. Roughly 55 percent of that total was for performance-based compensation. Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions and continue to pay nondeductible executive salaries. The number of executives receiving salary exceeding the maximum deductible threshold of $1 million actually increased from 563 in 2007 to 594 in 2018. For all that Section 162(m) is intended to limit excessive executive compensation, it is the shareholders and the U. S. Treasury who have suffered financial losses. The code does not prohibit firms from paying any type of compensation; instead, they are prohibited from deducting that amount on their tax return. The result is decreased company profits and diminished returns to the shareholders. Assuming a 25 percent marginal tax rate on corporate profits (a conservative estimate), revenue lost to the federal government in 2018 from deductible executive compensation was $7 billion, and the foregone federal revenue over the 2007–2018 period was $30.4 billion. More than half the foregone federal revenue is due to taxpayer subsidies for executive “performance pay.” Executive compensation will likely recover in the near future, exceeding levels seen in 2007.

1. Background.

Section 162 of the Internal Revenue Code covers trade and business expenses. As put forth in Section 162(a), entities are allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including, as noted in Section 162(a)(1), a reasonable allowance for salaries or other compensation for personal services actually rendered.

However, a number of sections of the Internal Revenue Code—in particular, sections 162(m), 162(m)(5), 162(m)(6), and 280(g)—limit the deductibility of executive compensation. Adopted in 1993, Section 162(m), which applies to publicly traded corporations, limits the deduction for executive compensation to $1 million per covered individual,1 with an exception for qualified performance-based compensation. That is, a company can deduct $1 million of non-performance-based compensation per covered individual and an unlimited amount of performance-based compensation.

In contrast to Section 162(m), sections 162(m)(5) and 162(m)(6) are more recent and narrowly targeted; they apply, respectively, to Troubled Asset Relief Program (TARP) participants and health insurers. They also set a lower limit on the tax deductions allowed for compensation at $500,000 per individual, with no distinction or exception for performance-based compensation. Section 162(m)(5) was adopted in 2008 and applies to the chief executive officer (CEO), chief financial officer (CFO), and next three highest paid officers of public and private entities that accepted money under TARP. Section 162(m)(6) becomes effective in 2018, and its limitations apply to most employees of health care providers. Section 280(g) does not apply to periodic payments to employees, but rather to change in control payments.2 If the amount is equal to or greater than three times the covered individual’s average W-2 compensation for the prior five years, the company forfeits the tax deduction for that payment, and the individual is subject to a 20 percent excise tax on the excess payment. As with sections 162(m)(5) and 162(m)(6), Section 280(g) contains no performance-based exception.

To discuss the tax deductibility of executive compensation, this paper will focus on Section 162(m) because of its broader reach. Remember, it is not limited to a specific sector of the economy; it limits the deduction for executive compensation in public corporations to $1 million per covered individual, with an exception for qualified performance-based compensation. To qualify as performance-based compensation, the following requirements must be met:

The compensation must be paid solely on account of the executive’s attainment of one or more performance goals determined by an objective formula. These goals can include stock price, market share, sales, costs or earnings, and can be applied to individuals, business units, or the corporation as a whole; The performance goals must be established by a compensation committee of two or more independent directors; The terms must be disclosed to shareholders and approved by a majority vote; and The compensation committee must certify that the performance goals have been met before payment is made.

While Section 162(m) is intended to limit excessive executive compensation, this author sees several weaknesses or loopholes in the code. Regarding shareholder approval, companies need only give shareholders the most general terms when they put the compensation plan up for a vote. Shareholders are asked to, and usually do, approve plans without knowing whether the performance conditions are challenging or not, and the potential payouts from the plan. Those details are left to the compensation committee, which must set the terms no later than the first quarter of the company’s fiscal year. Also problematic is that if these terms are not met, the corporation is not prohibited from paying the compensation. Instead, it is prohibited from deducting that amount on its tax return. The result is decreased company profits. The ones who suffer are the shareholders—the same people who, even in this day of expanded compensation disclosures, are not provided with details on the executive compensation plans before being asked to vote on them, nor are they given information on the tax deductions taken or forfeited.

In Section 2, we will go through the components of the compensation package and discuss the tax consequences of each. Section 3 will utilize executive compensation information disclosed in corporate proxy statements—those required statements, useful in assessing how management is paid and identifying potential conflicts of interest, that must be filed with the U. S. Securities and Exchange Commission (Form DEF 14A)—to summarize and tabulate compensation reported for each year from 2007 to 2018 and to contrast the amounts reported with those actually deductible by those corporations. Section 4 will estimate the revenue loss associated with those deductions. The paper will conclude with Section 5, which will look back on the impact of these tax provisions, specifically the limitations on deductions and their effect on executive compensation, and look forward to how certain current events, such as the adoption of say-on-pay policies, will affect the future of executive compensation.

2. Components of the executive compensation package.

Before we can fully explore the consequences of Section 162(m), we need to understand the executive compensation package. Hence, this section will introduce the components of the compensation package, which are summarized in the chart titled “Components of the compensation package,” and discuss their tax consequences to the executive and to the company.

Components of the compensation package.

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Salary is the fixed, possibly contracted, amount of compensation that does not explicitly vary with performance. By definition, salary is not performance-based and therefore would not qualify for the performance-based exception under Section 162(m). Consequently it is taxable for the executive and deductible for the firm (subject to deduction limitations) in the year paid. It should be noted that the $1 million deduction limitation applies to all non-performance compensation in aggregate, not each individual component of that compensation. If a firm pays an executive salary of $750,000, the entire amount would be deductible. However, if it pays an additional $500,000 in other forms of non-performance compensation, its total deduction for non-performance-based compensation would be limited to $1 million; the additional $250,000 is not deductible.

Bonus compensation may be conditioned on the performance of an individual, group, or corporation. Because it is conditioned upon performance, it is often paid after the end of the company’s fiscal year. From the employee’s point of view it is taxable not in the year earned, but in the year received. For the employer, Treasury Regulation 1.404(b)-1T allows that a corporation using an accrual method of accounting can use the deduction in the year earned if an employee receives compensation within 2.5 months after the end of the employer’s taxable year. In other words, bonuses are taxable to the executive in the year received, while deductible (subject to deduction limitations) in the year earned (under the assumption that bonuses are paid out within 2.5 months of year-end). Although bonuses are theoretically a reward for performance, they are not awarded or paid pursuant to a written plan approved by shareholders,3 and therefore do not qualify as performance-based under Section 162(m).

Non-equity incentive plan compensation.

Similar to bonuses, non-equity incentive plan compensation may be conditioned upon individual, group, or corporate performance. The difference between the two is that non-equity incentive plan compensation is paid under a written plan, which, for purposes of this study, we will assume meets the requirements of Section 162(m).4 Consequently, payments under a non-equity incentive plan are fully taxable to the executive in the year received and deductible by the company in the year earned.5.

Stock grants.

Stock grants occur when corporations give shares to their employees.6 They differ from stock options in that they have no exercise price. Whereas a stock option only has value if the corporation’s share price is above the exercise price, a stock grant has value as long as the share price is above zero. Consequently, a stock grant is always worth more than a stock-option grant for the same number of shares. Stock grants can be unrestricted or restricted; however, the vast majority of employee grants are restricted. For example, a restriction might be that the executive cannot sell the shares until he or she has worked for the corporation for a period of time (a typical vesting period would be three or four years). Restrictions may also be based upon performance. For example, the executive will forfeit the shares if earnings and/or stock returns do not achieve a pre-established goal.7 Once these restrictions expire, the executive has full ownership of the shares and, absent a Section 83(b) election,8 will immediately recognize taxable income equivalent to the fair value of the stock at that time. Therefore, the year of grant and the year of tax recognition are usually different. The deductibility of the stock grants as performance-based depends on those restrictions. That is, if the restrictions are based upon performance, then the stock grants may qualify for the performance-based exception under Section 162(m),9 whereas if the restrictions expire only with the passage of time, then they do not. In recent years there has been a trend to greater usage of what is now termed “performance shares”; however, in previous years they were a distinct minority of stock grants. Consequently, the assumption made in this paper is that most of the grants made in earlier years and vesting in the observation period do not qualify for the Section 162(m) performance-based exception. The possibility is that as more grants become performance-based, the percentage and dollar amount of executive compensation that will be deductible will increase. Even performance-based stock grants, however, need not meet the requirements for deductibility. Consider the following passage from the 2018 Intel Corporation proxy statement:

Section 162(m) of the tax code places a limit of $1 million on the amount of compensation that Intel may deduct in any one year with respect to its CEO and each of the next three most highly compensated executive officers (excluding the CFO). Certain performance-based compensation approved by stockholders is not subject to this deduction limit. Intel structured its 2006 Equity Incentive Plan with the intention that stock options awarded under the plan would qualify for tax deductibility. In addition, in order to maintain flexibility and promote simplicity in the administration of these arrangements, other compensation, such as OSUs, RSUs, and annual and semiannual incentive cash payments, are not designed to qualify for tax deductibility above the tax code Section 162(m) $1 million limitation.

The OSUs referred to in the above passage are outperformance stock units, i. e., performance-based, and yet are not designed to qualify under Section 162(m).

Stock options.

Stock options allow their holder to purchase one or more shares of stock at a fixed exercise price over a fixed period of time. They have value if the corporation’s share price at the time of exercise or purchase is greater than the exercise price. Since the exercise price is normally set at the share price on the date of grant, the ultimate value of the option depends upon the performance of a corporation’s share price subsequent to the date of grant. That is, they can be extremely valuable when the share price rises dramatically, but can also expire worthless if the share price declines. Like stock grants, stock options are normally granted to executives with restrictions. These restrictions generally expire with the passage of time. While companies can add performance conditions to their stock options, currently that is rather infrequent. As with stock grants, the year of grant and year of tax recognition is normally different for stock options. They differ, however, in that stock grants are taxable upon expiration of the restrictions or vesting, whereas stock options are not taxable until the holder elects to exercise the options.10 The amount that is taxable is not the fair value of the shares acquired, but the bargain element or discount, i. e., the difference between the fair value of the shares acquired less the exercise or purchase price paid. Stock options are considered performance-based under Section 162(m) if they meet minimal conditions (e. g., shareholder approval, options granted with an exercise price at or above market price on date of grant), the reasoning being that the option holder can only profit from the option if the share price increases. Thus the assumption made in this study is that stock option compensation is fully deductible to the firm.

Stock appreciation rights.

While not as popular as stock options and grants, some companies grant stock appreciation rights (SARs). Stock appreciation rights are the right to receive the increase in the value of a specified number of shares of common stock over a defined period of time. Economically, they are equivalent to stock options, with one exception. With a stock option, the executive has to purchase and then sell the shares to receive his or her profit. With a stock appreciation right, the corporation simply pays the executive, in cash or common stock, the excess of the current market price of the shares over the exercise price. Thus the executive is able to realize the benefits of a stock option without having to purchase the stock. In many cases, stock appreciation rights are granted in tandem with stock options where the executive, at the time of exercise, can choose either the stock option or stock appreciation right. For proxy-statement reporting purposes, SARs are combined with stock options. Similarly, they are treated like stock options for tax—including Section 162(m)—purposes. Consequently, for this analysis SARs will be incorporated into the broader category of stock options.

Pensions and deferred compensation.

Deferred compensation is compensation that is earned in one period but deferred by the executive to be received in a future period. If it meets the requirements of Section 409(A) of the Internal Revenue Code, tax recognition may also be deferred until a future period. Pensions are a form of deferred compensation (covered by multiple separate sections of the Internal Revenue Code), whereby after retirement from the corporation, the employee receives a payment or series of payments. These payments may be defined by the pension plan (known as a defined benefit plan), or based upon the amounts accumulated in the employee’s personal retirement account (known as a defined contribution plan, one type of which is a 401(k)). If the payments are defined by the pension plan they can be based upon a number of factors including, but not limited to, number of years with the corporation, earnings while working, and level within corporation. Pensions can be structured in many ways; for example, the payments can be fixed in amount, or they can be adjusted for inflation. Due to Internal Revenue Code limitations, executives are usually covered by more than one plan. That is, they participate in a primary “tax qualified” plan along with other employees, and have at least one “supplemental” non-qualified plan. The second plan is necessitated by Internal Revenue Code limitations on payments from a qualified plan. That is, in order to qualify for favorable tax treatment, the plan must be nondiscriminatory, that is, the benefits cannot be skewed in favor of highly paid employees, and the corporation cannot consider compensation in excess of a threshold, which was $250,000 for the year 2018 (Section 401(a)(17)), in determining pension benefits, nor make payments in excess of $200,000 (Section 415(b)). Most top executives make substantially larger sums.

For tax purposes, both defined benefit and defined contribution plans are divided into qualified and non-qualified plans. With a qualified plan, the company can contribute or fund it currently, and take the corresponding tax deductions (above and beyond the Section 162(m) limitations), while the executive does not recognize taxable income until the future when he or she receives the payments. However, given the limitations discussed above, companies turn to non-qualified or supplemental executive retirement plans (SERPs) for the bulk of retirement payments to their executives. Because these plans are not qualified, they are unfunded, as funding would subject the executive to current taxation.

To sum up, the bulk of pension and deferred-compensation payments are both taxable and deductible after retirement, at which point they are no longer disclosed in the corporate proxy statement. At that time, they will be fully deductible, as the then-retired executive will no longer be subject to Section 162(m). Thus, while the next section will discuss the amounts reported as increases in pensions and deferred compensation in the proxy statement, it will not incorporate any of those amounts when estimating the immediate tax consequences of executive compensation.11.

All other compensation.

The proxy statement summary compensation table contains one other category, a catch-all category that encompasses everything not included in the prior headings: “all other compensation.” All other compensation includes items such as those infamous perquisites; e. g., private airplanes, company cars, etc. For purposes of this paper, we assume that the amounts reported as “all other compensation” in the proxy statement are currently taxable to the executive and deductible by the company, subject to Section 162(m) limitations, as they are not performance-based.

In the above summary chart, “Components of the compensation package,” we use the phrase “likely to be fully deductible” for a reason. As outsiders, drawing data from a large-scale database, we cannot determine precisely what is and what is not deductible. Note from above that performance-based compensation can qualify for full deductibility if the company meets the requirements set forth in the Internal Revenue Code. However, sometimes companies choose not to comply with those requirements. Consider the following excerpt from Goodyear Tire & Rubber Company’s most recent proxy statement:

Tax Deductibility of Pay.

Section 162(m) of the Code provides that compensation paid to a public company’s chief executive officer and its three other highest paid executive officers at the end of the year (other than its chief financial officer) in excess of $1 million is not deductible unless certain requirements have been satisfied. The Compensation Committee believes that awards under the Management Incentive Plan and the 2008 Performance Plan qualify for full deductibility under Section 162(m).

Although compensation paid under the Executive Performance Plan is performance-based, it does not qualify for the deductibility exception for performance-based compensation since that Plan has not been approved by our shareholders. Therefore, payments under the Executive Performance Plan are subject to the Section 162(m) limitation on deductibility. Because of our significant U. S. deferred tax assets from prior periods, the limitation on deductibility has no impact on our financial position. In reviewing and considering payouts or earnings under the Executive Performance Plan, the Compensation Committee considered not only the impact of the lost tax deductions, but also the significant U. S. deferred tax assets available to us from prior periods, as well as the benefits realized by us and our shareholders from the successful efforts of our senior management team. In balancing these considerations, the Compensation Committee concluded that it would be appropriate to approve payouts in respect of the 2009-2018 grants and earnings for the 2018 performance period in respect of the 2018-2018 and 2018-2018 grants.

Without reading this passage we would have assumed that compensation paid under the Executive Performance Plan, which will be reported as non-equity incentive plan compensation, would be fully deductible. A further complication is that payments under both the Management Incentive Plan, which does qualify for the performance-based exception, and the Executive Performance Plan, which does not, are reported in the proxy statement summary compensation table as one number under the non-equity incentive column. And while Goodyear is to be commended for the clarity of its disclosure, most disclosures are not that clear.

3. Executive compensation, 2007–2018.

This section provides an analysis and discussion of executive compensation paid over 2007–2018. As shown in Table 1 , the sample is the population of U. S. public corporations as included in the Standard & Poor’s Capital IQ database and ranges from 8,960 in 2007 to 7,248 in 2018.12 Under current Securities and Exchange Commission regulations, companies are required to report in their proxy statements the compensation of each and every individual who has held either the CEO or CFO title during the year, compensation of the next three highest paid individuals,13 and compensation of up to two additional individuals who would have been among the next three highest paid individuals except that they were no longer employed at the end of the year. Reporting is not required if an individual’s compensation is less than $100,000. Turning to the second column of Table 1, we see that the number of executives included in the analysis ranges from 38,824 in 2007 to 28,365 in 2018.14 While Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals, excluding the CFO, Capital IQ and consequently we, include compensation of all executives included in the proxy statement. For executives beyond the CEO and the next three highest paid individuals we assume that compensation is fully deductible.

Sample information.

Source: Author's analysis of Capital IQ microdata.

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Table 2 describes the various components of the compensation package for 2007–2018, and lists the number of individuals receiving the item in a given year.15 For example, all executives in our sample receive a salary (companies with missing salary data are excluded from the analysis), but not all receive bonuses, and even fewer receive non-equity incentives and other forms of compensation. The mean total compensation was highest in 2007, at just over $1.7 million. The ensuing decrease in average compensation is due to the sharp drop in stock prices, which diminished the value of stock grants. The mean compensation values in this table are lower than those normally observed in the press and most studies for two reasons. The first is that most studies limit themselves to CEO compensation, whereas this study expands the sample to all executives. Because other executives are normally paid less than the CEO, this drives the average down. For example, in 2007 average total compensation for CEOs was $3,468,375, while the average for non-CEOs was $1,191,828. The second reason for lower means is the broader sample of companies used in this study. Most studies limit themselves to the S&P 500 or the S&P 1500 companies as encompassed in Standard & Poor’s ExecuComp, whereas this study incorporates those companies and many smaller publicly traded companies. Because compensation tends to increase with firm size, inclusion of these smaller companies reduces our averages. For example, in 2007 the average total compensation for executives in S&P 500 companies was $4,994,819, while the average for other companies was $1,448,167.

Mean amounts for executive compensation reported in summary compensation table (dollars; number of executives are below mean amounts)

Source: Author's analysis of Capital IQ microdata.

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Table 3 aggregates the amounts reported in Table 2 to illustrate the total of executive compensation for all publicly traded companies. Aggregate total compensation decreased from over $66 billion in 2007 to $42 billion in 2018. There are two reasons for this decrease. First, the number of companies/executives incorporated in our analysis decreased in 2018 (as shown in Table 1 and reflecting the decline in the number of publicly traded companies). Second, average compensation (as shown in Table 2) decreased as well.

Aggregate amounts for executive compensation reported in summary compensation table (billions of dollars; number of executives are below aggregate amounts)

Source: Author's analysis of Capital IQ microdata.

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As discussed in Section 2, the year of taxability for equity compensation, i. e., stock grants and stock options, differs from the year of grant. Similarly, the amounts will differ from that reported in the year of grant, as the amount reported in the year of grant will be based upon an expected amount, while that included in the executives’ income/deducted from the companies’ taxable income will be based on the actual amount. The amounts reported in tables 2 and 3 are grant date values based upon amounts from the proxy statement summary compensation table. In contrast, the amounts in Table 4 are based upon the vesting date value of stock grants and exercise date profits for stock options, as reported by companies in their proxy statements. Looking at the mean amounts, we are somewhat surprised to see that the number of employees with stock grants vesting (Table 4) is significantly less than the number receiving stock grants (Table 2). A number of potential explanations for this exist, such as stock grants vesting after retirement or stock grants not vesting because restrictions were not met. Unfortunately, the data do not allow us to determine what these reasons are. Similarly, for stock grants the aggregate amount recognized for tax purposes in Table 4 is less than the amount reported in Table 3, although the taxable amounts for stock options are generally greater than that reported in the summary compensation table.

Amounts reported for vested shares and exercised options (number of executives are below dollar amounts)

Source: Author's analysis of Capital IQ microdata.

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Table 5 focuses on the impact of Section 162(m) on the deductibility of non-performance-based compensation, which is defined as salary, bonus, stock grants, and all other compensation. As noted above, although the bonus is normally performance-based, if it is not paid pursuant to a written plan that meets Internal Revenue Code requirements, it will not qualify for the performance-based exception (and if it were paid pursuant to a written plan, it should be included in the non-equity incentive column). Stock grants with performance conditions have become more common, and therefore may qualify for the Section 162(m) performance-based exception,16 but constitute a minority of those stock grants that vested during the years 2007 through 2018. Consequently we sum these four items—salary, bonus, stock grants, and all other compensation—by individual and treat the first $1 million as deductible.

Decomposition of non-performance-based compensation into deductible and nondeductible amounts (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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We shift gears in Table 6 to examine the total deductions associated with executive compensation, performance and non-performance based. On an aggregate basis the deductible components of the compensation package decline from about $39 billion in 2007 to a little less than $28 billion in 2018, with much of the decrease being associated with fewer deductions associated with stock options. In 2018 $15 billion of the deductions were based on performance pay, down from roughly $24 billion in 2007. As discussed in the next section, even at these reduced amounts in 2018 there are substantial tax savings for the companies and revenue foregone to the federal government. The Appendix Table provides more detail underlying the aggregates in Table 6 by delineating the total deductions for CEOs and other executives and doing so for large firms (S&P 500) and other firms.

Total deductible compensation (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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Compensation, taxation, and deductibility: An illustration.

At this point an illustration comparing the amounts reported in the proxy statement summary compensation table, executive’s tax return, and corporation’s tax return might be informative. Consider the 2018 compensation of Paul S. Otellini, president and CEO of Intel. According to the proxy statement summary compensation table, he received total compensation of $17,491,900 for that year.

Of that amount, stock awards ($7,331,100), option awards ($1,802,800), and change in deferred compensation ($319,000) are not taxable currently. His taxable income from Intel will include a salary ($1,100,000), a bonus ($34,000), non-equity incentive plan income ($6,429,500), all other compensation ($475,500), stock grants that vested during the year ($1,319,600), and exercised stock options ($132,100). His total taxable income was therefore $9,490,700.

The amount currently deductible by Intel includes both non-performance compensation and compensation that qualifies for the performance-based exception. Non-performance compensation includes the salary ($1,100,000), bonus ($34,000), all other compensation ($475,500), and stock grants that vested during the year ($1,319,600), for a total of $2,929,100. With the $1 million cap on deductions, Intel forfeits deductions on $1,929,100 of CEO compensation. At the same time, it can deduct for non-performance-based compensation (the maximum allowable at $1 million), non-equity incentive plan income ($6,429,500), and the exercised stock options ($132,100), for a total deduction of $7,561,600—an amount much less than Mr. Otellini’s $9,490,700 in taxable income.

Mr. Otellini and Intel provide a perfect illustration of the aggregate numbers in Table 5. What is most interesting, to this author, about Table 5 is the magnitude of deductions being forfeited by public corporations for the sake of executive compensation. Over the four-year period examined, executives recognized $96 billion in taxable income from the four categories of salary, bonus, vest value of stock grants, and all other compensation, while companies only deducted $55 billion, forfeiting slightly more than $41 billion in potential deductions!

Hence, one of the problems with Section 162(m), which was adopted ostensibly to reduce excessive, non-performance-based compensation (see U. S. House of Representatives 1993), was that it never touched on compensation directly. Instead, it legislated the deductibility of that compensation and penalized shareholders rather than executives. While corporations have “paid lip service” to the idea of preserving deductions, empirical research has shown only a marginal effect on executive compensation.17 Overall, however, executive compensation has continued to grow, and with it deductions have been forfeited.18 For example, the number of executives receiving salary in excess of $1 million increased from 563 in 2007 to 594 in 2018, and the number of executives receiving non-performance-based compensation in excess of $1 million increased from 3,379 in 2007 to 4,729 in 2018. This is despite a substantial decrease in the number of executives covered from 2007 to 2018 (see Table 1). Seemingly tax-sophisticated corporations seem not to care about the restrictions on deductions.

Consider Apple Inc. Duhigg and Kocieniewski (2018) detail how Apple avoids billions in taxes by setting up subsidiaries in low-tax jurisdictions. Yet when Apple made Tim Cook their CEO in August 2018, they gave him one million shares of restricted stock that vested purely with the passage of time, which therefore is not performance-based. Consequently, this grant, valued at $378 million at the time it was made, would not meet the performance-based exception of Section 162(m) and therefore would not be deductible—costing shareholders more than $100 million in additional taxes!

4. Tax benefits to corporations.

As noted above, compensation is normally deductible as an ordinary business expense under Section 162 of the Internal Revenue Code. This benefit can be large for the corporation and costly for the federal Treasury,19 as the corporate tax rate is 15 percent for taxable incomes under $50,000, 25 percent for those between $50,000 and $75,000, 34 percent for those between $75,000 and $100,000, 39 percent for those between $100,000 and $333,333, and 34 percent for taxable incomes between $333,333 and $10 million.20 Above $10 million, the rate increases to 35 percent (except between $15,000,000 and $18,333,333, where the tax rate is 38 percent). A reasonable assumption is that most public corporations have taxable incomes in excess of $100,000, so their tax rate would either be 34 or 35 percent.

For a number of reasons, such as tax deductions and credits, even large public corporations may pay taxes at a lower rate, or not at all—thus the tax benefit of executive compensation can be overstated. An example is Whirlpool Corporation, which, due to tax credits, did not pay taxes in 2018 and 2018. Whirlpool is not alone in this regard (for example, see the Goodyear excerpt above). So the question becomes: What is the value of the tax deductions associated with executive compensation to companies like Whirlpool? Note that if the corporation has a tax loss, as in the case of Whirlpool, it can use that loss to claim a refund on taxes paid in the previous two years or to shelter taxable income earned in the following 20 years. In theory, even if the company does not have any current taxable income, a $1 additional deduction will either increase this year’s tax refund by 35 cents, or reduce future taxes by 35 cents. But in practice, sometimes a company can’t claim the carryback because it hasn’t paid federal taxes in the past two years, and the existence of taxable income in the future may be uncertain as well. If so, how do we estimate the benefits of these deductions?

Academic researchers answer this question by estimating marginal tax rates, the rate of tax/benefit associated with the next dollar of income/deduction. Professor John Graham of Duke University, who has done extensive research in the area (see Graham 1996), provides estimates of these rates on his website, faculty. fuqua. duke. edu/

jgraham/taxform. html. Unfortunately, he does not provide tax rates for all companies in the Capital IQ data set. But for the approximately 25 percent of observations for which he does provide tax rates, the rates he provides are substantially lower than 35 percent, as the mean of his rates is slightly below 13 percent. As an alternative, in another paper (Graham and Mills 2008) he provides a fairly simple and less data-intensive method of calculating marginal tax rates. Using that algorithm still results in a sample reduction of about 30 percent, but perhaps a more realistic average tax rate of 25 percent. However, both rates are calculated after the impact of executive compensation, and Graham, Lang, and Shackelford (2004), among others, document that the stock-option deduction can significantly decrease marginal tax rates. So when calculating the average tax benefit of the executive compensation deductions, the relevant tax rate to use is something lower than 35 percent, yet is somewhat higher, perhaps significantly higher, than 13 or 25 percent. For this reason, Table 7 provides estimates using three alternative rates—15, 25, and 35 percent—while the following discussion uses what is probably the most realistic estimate, 25 percent.

Estimated tax savings/revenue loss as a result of executive compensation (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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Table 7 provides some boundaries for the aggregate tax savings to companies and costs to the Treasury using effective tax rates of 15, 25, and 35 percent. Using the 15 percent rate provides the lower bound on our estimate of the tax savings, which ranges from about $3.5 billion in 2009 to just under $6 billion in 2007. In contrast, using the 35 percent statutory federal rate provides an upper bound on our estimate of the aggregate tax benefits/cost to the U. S. Treasury, which ranges from about $13.7 billion in 2007 to $8.3 billion in 2009. If we assume a conservatively estimated 25 percent marginal tax rate, then revenue lost to the federal government in 2018 from deductible executive compensation was about $7 billion, and the total amount lost over the 2007–2018 period was $30.4 billion.

5. Looking back and forward.

While the data provided in this study do show a moderating of executive compensation over the study period 2007–2018, over a longer period it is well known that executive, in particular CEO, compensation has increased at rates far in excess of inflation and the wage growth of rank-and-file individuals. So the question exists: Is the moderating trend observed over the recent past a new paradigm, or is it merely one of the outcomes of the country’s severe financial crisis?

In terms of a new paradigm, 2018 marked a once-in-a-lifetime opportunity for shareholder empowerment. That July, the Dodd-Frank banking bill imposed the long-awaited “say-on-pay” on American corporations, which took effect with annual meetings on or after January 21, 2018. This provision, which was widely opposed by the business community, requires that publicly traded corporations provide their shareholders with a non-binding vote on their executive compensation at least once every three years. While the vote is (1) after the fact, i. e., shareholders are voting to approve compensation provided in the previous year, and (2) advisory, the possibility does exist that the board will moderate compensation to avoid being embarrassed by a negative outcome.21 In fact, Lucien Bebchuk of Harvard University notes in several of his papers that shame is perhaps the only constraint on executive compensation. Academic research in the United Kingdom, where say-on-pay has been in effect since 2002, and in the United States, by this author, suggests that say-on-pay can have a restraining impact on executive compensation under certain circumstances.

Another provision of the Dodd-Frank banking bill, which has not yet been implemented by the Securities and Exchange Commission, is the requirement that companies disclose the ratio of CEO compensation to that of the company’s median employee. This disclosure, which has been opposed by companies, also has the potential to embarrass corporate boards and CEOs, and if put into place, has the potential to restrain executive compensation.22.

But looking back, a reasonable question might be whether mandatory disclosure and tax penalties have worked to restrain compensation. In this author’s lifetime, the first big change in proxy statement disclosure was made in 1993. This disclosure, which dramatically increased the amount disclosed, inadvertently led to increased compensation, as executives at one company were able to more clearly assess what executives at their competitors were making. Section 280(g) of the Internal Revenue Code caused companies to forfeit deductions and imposed penalties on the recipient, if change-in-control payments (i. e., “golden parachutes”) were higher than allowed by the section. This Internal Revenue Code section did little, if anything, to curtail those payments, as companies without change-in-control payments added them, while those with change-in-control payments in excess of that allowed added the now-infamous tax gross-ups, whereby the shareholders would provide additional compensation to pay the executive’s tax penalty as well as the tax on that additional compensation. The same holds true for Section 162(m). Harris and Livingstone (2002) suggest that inadvertently, Section 162(m) may have encouraged increases in cash compensation for executives earning less than $1 million. Balsam and Ryan (2008) find that Section 162(m) resulted in increases in stock option compensation for executives earning more than $1 million in cash compensation. And although stock options were in favor amongst the political class when Section 162(m) was adopted, by the time the 21st century rolled around, the shine had worn off. In discussing the effect of Section 162(m) on the increased use of stock options, a 2006 Wall Street Journal article (Maremont and Forelle 2006) quoted Christopher Cox, the then-chairman of the Securities and Exchange Commission, as saying it deserves a “place in the museum of unintended consequences.”

The belief of this author is that executive compensation will recover in the near future, exceeding levels seen in 2007. Some of that increase will be in the form of deductible performance-based compensation, but the level of non-performance-based compensation will increase as well.

— EPI would like to thank the Stephen Silberstein Foundation for supporting its work on executive compensation.

— Steven Balsam is Professor of Accounting and Senior Merves Research Fellow at the Fox School of Business at Temple University. He has written several books on executive compensation including Executive Compensation: An Introduction to Practice and Theory , as well as published in the top academic and practitioner journals in accounting. Professor Balsam is also a member of the editorial boards of the Journal of Accounting and Public Policy and The International Journal of Accounting . He has been widely quoted in the media and has given expert witness testimony on executive compensation to the U. S. Senate Committee on Finance.

1. Covered individuals were originally defined as the chief executive officer plus the next four highest paid executive officers, as disclosed in the corporate proxy statement. However, in late 2006 the Securities and Exchange Commission changed the proxy statement disclosure requirements, so that corporations had to disclose compensation for the chief executive officer, chief financial officer, and next three highest paid executive officers. Since Section 162(m) does not specify the chief financial officer, covered individuals are now the chief executive officer plus the next three highest paid executive officers.

2. A change in control payment, also known as a golden parachute, is a payment to an executive that occurs when his or her company experiences a change in ownership.

3. For purposes of proxy statement reporting, awards pursuant to a written plan have been incorporated under the heading of “non-equity incentive plan compensation” since the end of 2006. It is common to combine the two categories of bonus and non-equity incentive plan compensation for other purposes.

4. This may not always be the case; even when there is a written plan, the plan may not meet Section 162(m) requirements. In a private letter ruling (irs. gov/pub/irs-wd/0804004.pdf) the IRS informed the company in question that compensation paid under its incentive plan would not qualify as performance-based, because the plan allowed for payments in the event of termination regardless of whether the performance conditions were met.

5. When the compensation is earned over a multiple year period, e. g., a two - or three-year performance period, the deduction would be taken in the last year of the period.

6. Sometimes rather than granting shares, companies grant units, which are then turned into shares upon vesting.

7. In most cases, meeting performance conditions is not a yes/no proposition. Typically, the percentage of shares that vest vary based upon performance, with a lesser number of shares vesting if performance meets the pre-established minimum threshold, the full grant vesting if performance meets the pre-established target, and possibly additional shares being earned if performance exceeds the target, up to a maximum that is usually defined as 200 percent of the original grant.

8. Normally a stock grant is not taxable to the recipient or deductible by the grantor until the restrictions expire. However, under tax code Section 83(b) the recipient may elect to have the grant taxed at the time of grant. Discussions with practitioners confirm these elections are rare in public companies.

9. Companies do not always clearly disclose whether their compensation qualifies as performance-based, nor do they disclose the amounts of deductions forfeited.

10. This discussion ignores Section 422 (tax-qualified or incentive) stock options. A Section 422 stock option provides benefits to its holder, as the tax event is not exercised, but rather the later sale of the shares is acquired upon exercise. Further, if certain conditions are met (for example, the shares are held from two years from the date of grant to one year from the date of exercise), the income is taxed as a capital gain and not ordinary income. While these options are beneficial to their holder, they are costly to the company, because if the holder meets the conditions for capital gain treatment, the company does not receive any tax deduction. However, because these options are limited to $100,000 in nominal value vesting per year and are considered tax-preference items at the time of exercise for purposes of the alternative minimum tax, they are not very useful (or used) in executive compensation. Thus we can safely ignore them in our discussion.

11. While pensions and deferred compensation need to be recognized as financial accounting expenses and disclosed in proxy statements in the year earned, for tax purposes they receive deferred recognition. Consequently, if deferred until the executive is no longer covered by Section 162(m) (e. g., post-retirement), they will be fully deductible for tax purposes.

12. This decrease is consistent with the decrease in publicly traded companies as documented in Stuart (2018). See cfo/article. cfm/14563859.

13. Since 2007, the Section 162(m) limitations only apply to the compensation of the CEO and the next three highest paid individuals.

14. In theory, each company should have a CEO, but not all companies identify an individual as such in their filings. Consequently, the number of CEOs is slightly less than the number of companies in each year.

15. Capital IQ collects and we analyze the values as reported by companies in their proxy statements.

16. But do not have to, as illustrated by the excerpt from the Intel proxy statement above.

17. For example, Balsam and Ryan (2007) show that Section 162(m) increased the performance sensitivity of bonus payments for CEOs hired post-1994.

18. For more discussion on the forfeiture of deductions, see Balsam and Yin (2005).

19. This analysis only incorporates federal taxes. Incorporating state income taxes would increase the benefit associated with compensation deductions.

20. The 39 percent tax rate is intended to remove the benefits associated with the 15 percent and 25 percent rates.

21. In the first two years of say-on-pay, more than 98 percent of companies have had their executive compensation approved by shareholders, with the typical firm receiving a positive vote in excess of 80 percent. However, some well-known companies have had their executive compensation rejected by shareholders, including Hewlett-Packard in 2018 and Citigroup in 2018.

22. While the disclosure only applies to CEO compensation, compensation of other executives is often tied to that of the CEO.

Referências.

Balsam, Steven, and David Ryan. 2007. “Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m).” Journal of Accounting, Auditing and Finance , vol. 22, no. 4, pp. 599–621.

Balsam, Steven, and David Ryan. 2008. “The Effect of Internal Revenue Code Section 162(m) on the Issuance of Stock Options.” Advances in Taxation , vol. 18, pp. 3–28.

Balsam, Steven, and Qin Jennifer Yin. 2005. “Explaining Firm Willingness to Forfeit.

Tax Deductions under Internal Revenue Code Section 162(m): The Million-dollar Cap.” Journal of Accounting and Public Policy , vol. 24, no. 4, pp. 300–324.

Capital IQ Database. 2018. Standard and Poor’s Financial Services LLC. capitaliq/home. aspx.

Duhigg, Charles, and David Kocieniewski. 2018. “How Apple Sidesteps Billions in Taxes.” New York Times , April 28. nytimes/2018/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations. html.

Graham, John R. 1996. “Proxies for the Corporate Marginal Tax Rate.” Journal of Financial Economics , vol. 42, no. 2, pp. 187–221.

Grassley, Chuck. 2006. “Executive Compensation: Backdating to the Future/Oversight of Current Issues Regarding Executive Compensation Including Backdating of Stock Options; and Tax Treatment of Executive Compensation, Retirement and Benefits.” Closing statement of Senator Chuck Grassley at a hearing of the U. S. Senate Finance Committee, September 6. finance. senate. gov/imo/media/doc/090606cga. pdf.

Graham, John R., Mark Lang, and Doug Shackelford. 2004. “Employee Stock Options, Corporate Taxes, and Debt Policy.” Journal of Finance , vol. 59, no. 4, pp. 1585–1618.

Graham, John R., and Lillian Mills. 2008. “Simulating Marginal Tax Rates Using Tax Return Data.” Journal of Accounting and Economics , vol. 46, no. 2–3, pp. 366–388.

Harris, David, and Jane Livingstone. 2002. “Federal Tax Legislation as a Political Cost Benchmark.” The Accounting Review , vol. 77 (October), pp. 997–1018.

Maremont, Mark, and Charles Forelle. 2006. “Bosses’ Pay: How Stock Options Became Part of the Problem – Once Seen as a Reform, They Grew Into Font of Riches And System to Be Gamed Reload, Reprice, Backdate.” The Wall Street Journal, December 27. online. wsj/article/SB116718927302760228-search. html.

Stuart, Alix. 2018. “Missing: Public Companies: Why Is the Number of Publicly Traded Companies in the U. S. Declining?” CFO, March 22. cfo/article. cfm/14563859.

U. S. House of Representatives. 1993. Fiscal Year Budget Reconciliation Recommendations of the Committee on Ways and Means. U. S. Government Printing Office.

Total deductible compensation (billions of dollars)

Source: Author's analysis of Capital IQ microdata.

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