Greenberg Traurig Alert

Steps Publicly Held Companies Should Take to Preserve Deductions Under Section 162(M) for Executive Compensation

March 1, 1997

The purpose of this ALERT is to remind our publicly-held clients of actions that should be taken at this time of the year to minimize the portion of the compensation paid to their senior executives that is not deductible by reason of the limitations under Section 162(m) of the Internal Revenue Code of 1996.

Section 162(m) generally precludes a publicly held corporation from deducting compensation in any year paid to its chief executive officer and its four most highly compensated officers (other than the CEO), if and to the extent that the compensation payable to any such officer for the year exceeds $1 million. The section 162(m) limitations do not apply, however, to qualified performance based compensation. To qualify as performance-based compensation:

1. The compensation must be paid solely on account of the attainment of one or more pre-established objective performance goals;
2. The performance goals under which compensation is paid must be established by a compensation committee comprised solely of two or more outside directors;
3. The material terms of the performance goals under which the compensation is to be paid must be disclosed to and subsequently approved by the shareholders of the publicly held corporation before the compensation is paid; and
4. The compensation committee must certify in writing prior to payment of the compensation that the performance goals and any other material terms were in fact satisfied.

Certification of Satisfaction of 1996 Performance Goals

As indicated above, one of the requirements for compensation to qualify as performance based compensation is that the compensation committee must certify in writing prior to payment of the compensation that the performance goals and any other material terms were in fact satisfied. For this purpose, approved minutes of the compensation committee meeting in which the certification is made are treated as a written certification. Certification is not required for compensation that is attributable solely to the increase in value of the corporation's stock. Thus, Committee certification would not be required with regard to stock options, restricted stock awards or stock appreciation rights.

Clients should be sure that, prior to the payment of compensation based upon 1996 performance, the minutes of the compensation committee contain a certification that the performance goals upon which such compensation is based have been satisfied.

Establishment of Goals for 1997

Treasury Regulations state that to qualify as performance based compensation, performance goals must be established in writing by the compensation committee not later than 90 days after the commencement of the period of service to which the performance goal relates, and at the time those goals are set, the outcome must be substantially uncertain. In addition, the performance goal must be established before 25% of the period of service has elapsed. Thus, performance goals established for incentive compensation for calendar year 1997 would need to be established by the compensation committee by no later than March 31, 1997.

Plans or Agreements In Effect Prior to December 20, 1993

Treasury Regulations issued under Section 162(m) provide for a transition rule pursuant to which compensation paid under a plan or agreement approved by shareholders before December 20, 1993 is treated as satisfying the requirements that the performance goals be established by a compensation committee comprised solely of Òoutside directorsÓ as defined in the Regulations and that the material terms of the performance goals be disclosed to and be approved by shareholders before the compensation is paid. To qualify under this transition rule, the directors administering the plan or agreement must be disinterested directors and the plan or agreement must have been approved by shareholders in a manner consistent with Rule 16b-3(b), as then in effect, under the Securities Exchange Act of 1934. In addition, such a plan or agreement is treated as satisfying the requirement that it state the maximum number of shares with respect to which options or rights may be granted during a specified period to any employee, if it was approved by shareholders and provided for an aggregate limit, consistent with Rule 16b-3(b) as then in effect, on the shares of employer stock with respect to which awards may be made under the plan or agreement.

The Regulations state that the foregoing transition rule expires on the earliest of:

1. The expiration of, or a material modification of, the plan or agreement;
2. The issuance of all employer stock and other compensation that has been allocated under the plan or agreement; or
3. The first meeting of shareholders at which directors are to be elected that occurs after December 31, 1996.

Thus, those clients that have relied upon this transition rule should amend their plans to include the individual limits so as to comply with Section 162(m), and obtain shareholder approval of their plans as so amended at their first shareholders' meeting at which directors are elected in 1997.