Why employers should revisit their executive compensation strategies
Roughly four in 10 companies are planning or considering changes to their executive pay programs, or have already taken action, according to a recent study by Willis Towers Watson.
While 59% of surveyed employers say they do not plan to make any changes to their executive compensation strategies, experts say they may seek to revisit their pay metrics later in the year once they set their 2018 fiscal goals.
The most common changes employers have made or are considering include spending more time and analysis on this year’s incentive target and increasing the use of discretion in 2018 incentive plans.
Steve Seelig, executive compensation counsel at Willis Towers Watson, says when discussing executive pay, employers should focus on two major changes that came from the Tax Cuts and Jobs Act. The first is that companies’ tax rates will go down, but the second change revolves around the timing of when the act was signed into law.
“The law was signed back in December 2017, which means companies are going to have a change in their 2017 year-end financials,” Seelig says. “The question we posed to the employers is supposed to make them look forward to determine whether or not they will make any changes in the future.”
The question of change stems from the loss of deduction for compensation in excess of $1 million under Code Section 162(m) of the Internal Revenue Code, which limits the ability of publicly held corporations to deduct annual compensation paid to a covered employee in excess of $1 million, with an exception to this limit for certain performance-based compensation.
In a recent analysis completed by Haynes and Boone, LLP, the law firms' attorneys identified that what is considered as a covered employee has also changed under the tax law.
Previously, Code Section 162(m) defined covered employees as the CEO and the three most highly compensated officers for the taxable year. The Act modifies the definition of covered employees subject to the $1 million deduction limit to now include CFOs and also adds a ‘once covered employee, always a covered employee,’ concept for any individual who was a covered employee on or after Jan. 1, 2017.
This means the rule will continue to cover former employees. For example, compensation paid after termination of employment — such as severance pay or nonqualified deferred compensation beyond separation — is generally exempt from the limits under Code Section 162(m).
Under the act, once the employee is covered by Code Section 162(m), he or she will remain covered for all future years — even after death, with respect to compensation payable to his or her estate or beneficiaries.
This could result in subjecting severance and other post-termination compensation to the deduction limit.
Finally, covered companies under Code Section 162(m) have also expanded. The code initially covered companies with publicly traded equities required to be registered under Section 12 of the Securities Exchange Act of 1934.
The act modifies this rule to also apply to companies that are required to file SEC reports under Section 15(d) of the Securities Exchange Act of 1934. This will pick up companies that report due to publicly traded debt, as well as certain foreign companies, according to the analysis done by Haynes and Boone, LLP.
Seelig says his impression from speaking with employers in regards to executive pay programs is that the results from Willis Towers Watson’s survey are surprisingly low.
“As companies get closer to their 2019 goal setting, they are going to find that they are going to be revisiting a lot of their pay metrics,” Seelig says. “Those discussions are still ongoing with clients, but the results of this survey may have under-reported what is really going on out there.”