I may have gotten some folks a bit too excited when I wrote about the positive aspects of the elimination of Section 162(m)’s performance-based compensation exception. Among the positive aspects cited was that eliminating the requirement the performance goals must be established by a compensation committee comprised solely of two or more outside directors will give companies the flexibility to include on their compensation committees, board members who would not have qualified as “outside directors” under the requirements of Section 162(m).
Since then, a few companies have called expressing a strong interest in reforming their compensation committees.* Whoa! There are at least two good reasons not to make any changes to the compensation committee yet.
First, a compensation committee qualifying under 162(m) still must certify the achievement of performance goals for performance periods ending in 2017. Most equity awards made before November 2017 should qualify for grandfathering under the 162(m) transition rule. Until IRS guidance clarifies the extent of the grandfathering protection, we don’t want to do anything that might adversely affect that.
Second, various other director independence rules continue to apply, including
- The Non-Employee Directors requirement under Rule 16b-3(d);
- The stock exchanges; and
- Exchange Act 10C (added by Dodd-Frank Act Section 952).
ISS also offers extensive guidance on its views in its U.S. Proxy Voting Manual.
So, as always, let’s be careful out there.
*No, the CEO’s mother cannot now sit on the compensation committee, even if she says that “he/she has always been such a nice boy/girl”.
