Executive Compensation Update

Editor’s Note: After press time, the IRS issued proposed regulations on deferred compensation under §409A (REG-158080-04). The proposed regulations identify which plans and arrangements are covered by §409A, outline operational requirements for deferral elections, and specify permissible timing for deferred compensation payments. The rules extend by a year the deadline by which plan sponsors must amend their plans to comply with the provisions of §409A, from December 31, 2005, to December 31, 2006. The proposed effective date is January 1, 2007. However, taxpayers may rely on the proposed rules until final regulations are effective. The proposed regulations are scheduled to appear in I.R.B. 2005-43, dated October 24, 2005.

The past year has witnessed continued developments in the federal tax and securities laws governing executive compensation as well as stock exchange and state activism in matters of corporate governance that affect executive compensation decision-making. The statutory, regulatory, and case law developments are multifaceted with far-reaching goals aimed at increasing stockholder approval rights, increasing the transparency of executive compensation disclosures, mandating and encouraging certain corporate governance practices, strengthening the enforcement powers of regulatory organizations, punishing bad actors, and reigning in the tax laws under which executive compensation programs, particularly nonqualified deferred compensation arrangements, may be designed and implemented. Many of these developments will have a significant impact on the manner in which both publicly traded and privately held corporations compensate their directors and executive officers. This memorandum provides a summary of recent significant tax law, securities law, stock exchange and case law developments that have affected or will affect executive compensation practices.