TAX BILL WOULD FUNDAMENTALLY ALTER EXECUTIVE COMPENSATION
Yesterday, the House of Representatives released its long-awaited tax bill, which if signed into law, would be titled the Tax Cuts and Jobs Act of 2017 (the “Bill”). While many of the broad concepts to be addressed by the Bill have been discussed for months in the media and otherwise, the Bill itself contains provisions not previously made public that would fundamentally alter the tax treatment, and therefore the design, of executive compensation.
GOLDSTEIN AND ASSOCIATES EXPLAIN THE “KNOCKOUT” OPTION: A NEW FORM OF STOCK OPTION
The popularity of stock options as a compensatory tool has been waning at public companies for years. While there have been a number of factors that have contributed to their decline over the past decade or so, three chief concerns about compensatory options have been: (1) the accounting expense associated with stock options often exceeds their perceived value from the perspective of employees, (2) if a company’s stock price falls dramatically and the options have little chance of being in-the-money, the company must still recognize an expense and still incur the overhang of options with no way of getting rid of them and (3) stock options provide a “heads I win; tails I don’t lose” form of compensation.
DIRECTORS MAY BE UNDERPAID, WACHTELL LIPTON TELLS ITS CLIENTS
Director pay has historically been limited by the view of the director as holding an independent trust and, once upon a time, the relatively limited time commitment that board service was thought to entail. More recently, boards have generally been wary of increasing their own pay in light of the downturn in the economy and public perception. The result is that levels of director compensation have not kept pace with the realities of the current marketplace. While directors are not employees and compensation is not the main motivating factor for public company directors, given the importance of board composition and the competition for the best candidates, it is important to evaluate whether these programs are appropriate to the company’s needs. Accordingly, as boards go through their self-evaluations, it is worthwhile to evaluate whether director compensation programs need adjustment consistent with the increased demands of board service, and whether they are adequate to secure top notch directors.