Executive Compensation

Executive Compensation Blog originally appears on CompensationStandards.com

In a private letter ruling dated September 21, 2007, but just released last Friday, the IRS ruled that employment agreement terms providing for the accelerated vesting of performance-based equity awards upon termination of the executive by the company without cause or termination by the executive for good reason, and payment at target performance levels, regardless of actual performance, would cause the awards to fail to satisfy 162(m)'s performance-based exception — even if the accelerated vesting and payout is never triggered. (See attachment)

The critical sections of the ruling read as follows:

"The provision in the Agreement allowing for payment of performance share or performance unit awards under the Plan upon Executive's termination by Company without cause or by Executive with good reason does not meet the exception in section 1.162-27(e)(2)(v) of the regulations that allows compensation to be payable upon death, disability or change of ownership or control. Thus, compensation paid to Executive with respect to performance share or performance unit awards is not payable solely upon attainment of a performance goal, for purposes of section 162(m)(4)(C) of the Code. Accordingly, we rule as follows:"

Compensation paid to Executive upon attainment of a performance goal under any performance share or performance unit awards will not be considered performance-based compensation under section 162(m)(4)(C) of the Code."

A private letter ruling can only be relied upon by the taxpayer who receives it.  However, this surprising development suggests that we all consider the language of our employment agreements and equity plans.