Public Companies Should Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2012

As public companies continue to prepare for the 2017 proxy season, we wanted to provide a final reminder of an executive compensation related item that might require shareholder approval in 2017.  As reported in Part 1 of our End of Year Plan Sponsor “To Do” Lists, Section 162(m) of the Internal Revenue Code limits the deduction a public company may take for compensation payable to “covered employees” to $1,000,000 per year. “Performance-based compensation” that meets the requirements of Section 162(m) is not subject to this limitation. The Section 162(m) regulations require that, if the Compensation Committee has the discretion to select among a variety of performance goals, those goals must be reapproved by shareholders every five years.  Consequently, companies that obtained shareholder approval of plans containing Section 162(m) performance goals in 2012 must resubmit the plans for shareholder approval in 2017. This is generally done by having the shareholders reapprove either the 162(m) performance goals or a new incentive plan that provides for the award of compensation that complies with Section 162(m).