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Dodd-Frank Act(ion) Items

We recently had one of our clients audited by the IRS w/ respect to their annual bonus plan. Not surprisingly, when we as a country are running a large deficit, the IRS will be looking for ways to bring in more revenue. What we have discovered is that the IRS is dramatically revising its position on bonus payment policies for deductibility. Specifically, if a plan requires the employee to be at the company at the time of payment, or the plan allows for positive and/or negative discretion in determining final payouts, the IRS is taking the position that the company will not be allowed the corresponding tax deduction. As stunning as this sounds, since this is the way most plans are designed, it looks like this is just the beginning. The following attached article by Miller & Chevalier provides a crisp summary of this new position:

Bonus Plan Changes

In addition, the Dodd-Frank Bill that was signed into law back in July, and outlined in our link below, is creating more questions than answers since there is still a great deal the SEC has not clarified. In essence, the proverbial cart was placed before the horse here, but with that being said, here are some key action items that we are working with our clients on:

  1. Review the Compensation Committee Charter for sound governance practices.
  2. Review the processes for determining executive and board compensation.
  3. Conduct an analysis of institutional shareholders to determine who follow RiskMetrics or Glass Lewis versus those institutions that have their own voting guidelines.
  4. Start a dialogue with institutional shareholders to solicit feedback on the company’s executive compensation practices.
  5. Review the role and independence of the company’s compensation consultant.
  6. Consider appointing the VP HR as a secretary to the Compensation Committee to ensure open lines of communication between management and the compensation committee, but reinforcing the committee’s overall authority.
  7. Review the new SEC guidelines issued December 16, 2009, for proxy disclosures (See NFPCCmp;A white paper, Immediate Compliance Changes).
  8. Review RMG’s 2010 compensation policy guidelines to at least be aware of them.
  9. Review the total direct compensation provided to the Named Executive Officers to ensure a connection between pay and performance.
  10. Consider conducting a compensation risk assessment.
  11. Review the Compensation Discussion & Analysis (CD&A) to ensure the company is disclosing compensation appropriately and telling the right story.

“Less Freedom to Pay”

Finally, the following piece is an NFPCCmp;A authored article that provides guidance on change-in-control agreements in light of recent changes in executive pay legislation. With as much cash sitting on the sidelines, we believe that we will start to see a plethora of M&A activity that will create a significant amount of press with respect to change in control payments. NFPCCmp;A is a strong believer in these plans, but it is critical that companies be proactively positioned in their strategic and competitive use.


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