Wednesday, October 19, 2011

Proposed Regulations Condition Sec. 162(m) Performance-Based Compensation on Specifying Individual Employee Stock Option Grants

The IRS has proposed regulations under IRC Sec. 162(m) clarifying that qualified performance-based compensation attributable to stock options and stock appreciation rights must specify the maximum number of shares with respect to which options or rights may be granted to each individual employee. Section 162(m) precludes a tax deduction by any public company for compensation paid to any covered employee to the extent that the compensation for the taxable year exceeds $1,000,000. The deduction limit does not apply to qualified performance-based compensation.

Stock options and stock appreciation rights are deemed to satisfy the performance goal requirement 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 employee; and, under the terms of the option or right, the amount of compensation the employee can receive is based solely on an increase in the value of the stock after the date of the grant or award. Shareholder approval of the plan is also a requirement for treatment as qualified performance-based compensation.

The proposed regulations clarify that the plan under which the option or right is granted must specify the maximum number of shares with respect to which options or rights may be granted to any individual employee during a specified period. Thus, if a plan states an aggregate maximum number of shares that may be granted but does not contain a specific per-employee limitation on the number of options that may be granted, then any compensation attributable to the stock options or rights granted under the plan is not qualified performance-based compensation

The proposed regulations also provide a related clarification of the shareholder approval requirement by stating that the requirement for description of the compensation in this section is satisfied where the maximum number of shares for which grants may be made to each individual employee during a specified period and the exercise price of those options is disclosed to the shareholders of the corporation.