Executive Compensation

Many companies will need to amend their employment agreements, equity plans and awards, and other incentive plans and agreements by December 31, 2009, to preserve the deductibility of performance-based awards and amounts under Code Section 162(m) [the $1 million limit on public companies ability to deduct compensation payments to its named executive officers] in light of Rev. Rul. 2008-13.

Background: Rev. Rul. 2008-13 held that if a plan or agreement provides for payment following an executive's termination without cause, for good reason, or due to retirement, the plan or agreement does not pay "remuneration payable solely on account of the attainment of one or more performance goals," as may be required by Code Sec. 162(m) and Treas. Reg. §1.162-27(e)(2)(i). Therefore, agreements providing for the accelerated vesting of performance-based cash or equity awards and a payment regardless of actual performance upon retirement, termination of the executive by the company without cause, or termination by the executive for good reason, would cause the awards to fail to satisfy 162(m)'s performance-based exception – even if the accelerated vesting and payout is never triggered. (The IRS first took this position in PLR 200804004.)

The IRS' rationale for this position was simple: terminations without cause, for good reason, or due to voluntary retirement, are not listed as permissible payment events under the 162(m) regulations. The IRS has also pointed out that, under the sample definitions of "cause" and "good reason" set forth in the ruling, the involuntary termination may arise as a result of the employee's poor performance and failure to meet the performance goal.

Effective Date Transition Rules: The IRS declared that it would not apply the holdings in the Rev. Rul. to disallow a deduction for any compensation that otherwise satisfies the requirements for qualified performance-based compensation under 162(m) and that is paid under a plan or agreement with payment terms similar to those in the ruling if either:

Thus, compensation paid for 2009 performance under most agreements and programs was exempt.

For most companies, the 2009 performance period is ending and, therefore, the delayed effective date under Rev. Rul. 2008-13 will not be available much longer. Every company should consider whether it needs to revise its performance-based compensation plans and agreements to comply with Rev. Rul. 2008-13 and, if it must, how to revise the plans and agreements to achieve the original purposes of the acceleration. Remember, Rev. Rul. 2008-13 would deny deductibility to plans and agreements with the offending language even if the acceleration event never occurs.