Executive Compensation Performance Metrics Will Change Under Tax Reform

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law, introducing the most sweeping changes to the tax code seen in decades. One of the most notable changes is a reduction in the corporate tax rate from 35 percent to 21 percent.

The obvious impact? Going forward, companies generally will pay less tax while making a larger share of profit available to shareholders. Less obvious is how tax reform will immediately affect financial statements. The change in the tax rate has some complicated ramifications on companies with deferred tax assets (DTAs), deferred tax liabilities (DTL), and significant profits outside the U.S. that are subject to repatriation taxes. The tax reform also changes section 162(m) of the tax code, which affects the deductibility of taxes for senior executives.

Here’s what each of these changes means to outstanding annual incentive and long-term incentive awards.

FEI Daily | 01/23/2018by FEI Daily Staff

Read more here.

Tax Reform and the Effect on Equity Compensation

In December 2017, the Tax Cuts and Jobs Act was signed into law, and among other changes, reduced the corporate tax rate from 35% to 21%. The act also ended the performance-based exemption to IRC Section 162(m) and expanded the pool of employees to which it applied to include the CFO. In other words, companies will no longer be able to deduct compensation in excess of $1 million paid to their top 5 executives starting in the 2018 tax year.

In 1993, the amount of compensation that corporations could deduct from their taxable income was capped at $1 million for select executive officers (the CEO and the 3 highest paid officers, excluding the CFO). The then-fresh change to the tax code came with a loophole. If the compensation was considered performance-based, then it was exempt from the rule and could be deducted—even if the executive received compensation in excess of the $1 million limit.

January 23, 2018

By Matthew Goforth, Senior Governance Advisor, Equilar

Read more here.

The Corporate Profit Windfall from the Tax Law Change

The tax reform bill that was signed into law on December 22, 2017 has many implications for individuals and businesses in 2018. Among other things, the bill includes a doubled standard deduction, a higher exemption from the estate tax, and limits on state and local tax deductions. Perhaps the largest change included in the bill is the reduction in the corporate tax rate from 35 percent to 21 percent. Even for companies that are not currently paying the full 35 percent tax rate, the new rate is likely to be a significant reduction in their tax burden. So, what exactly are companies going to do with the increased funds?

There are several possible ways that corporations may allocate their tax savings. Buying back shares, increasing dividends or ownership payments, increasing capital expenditures, hiring more workers, and increasing pay for employees have all been mentioned as ways that the money may be spent.

Around the time the bill was signed, several companies announced bonuses or increased pay for their employees. AT&T was the first, announcing a $1,000 bonus to many of its workers. Fifth Third Bancorp, a regional bank, decided to provide a $1,000 bonus, as well as increase the minimum wage for all its employees to at least $15 per hour. Wells Fargo also said that it would increase the minimum wage for its workers to $15 an hour. Boeing announced improvements to its benefits plan, as well as investments in workforce training and facilities. It is likely that other companies will follow suit in 2018 as they fully understand the tax bill changes.

There have also been indications that the slow pace of wage growth the U.S. has experienced since the recession is beginning to accelerate, and companies would do well to consider these changes in addressing their potential increase in net income from the tax law. The Labor Department reported that hourly earnings rose 2.9% in January, the largest year-over-year increase since June 2009, when the recession ended. Pay is rising at double the national average in metro areas such as Minneapolis, Denver, and Ft. Meyers, with unemployment near or below 3%. Employers in these metro areas are raising pay at or above pre-recession levels, and competition for skilled workers is especially intense. We believe that wage growth in these cities can be viewed as a bellwether for the country as the economy and labor market continue to improve.

Besides pay increases related to the tax reform bill, 18 states and a number of U.S. cities increased their minimum wage in 2018. Many of the states that are increasing their minimum wage are making substantial changes; in fact, the average increase among the 18 states is 4.4%, pointing to increases that go beyond the rate of inflation. Besides those who receive a pay raise directly due to the increases in minimum wage, other workers may be impacted as companies raise the pay for other hourly workers in order to control for wage compression in their pay structure.

Providing one-time bonuses may garner media attention, but the impact is short lived and doesn’t take into account increasing hourly earnings. Indicators are pointing toward increases to general wages for the first time since the recession, and 2018 may be the year that pay increases go beyond the 3% increase that has been typical in recent years. Companies may be wise to revisit their compensation systems in 2018 to ensure their ability to attract new hires, provide competitive pay to existing employees, and strengthen the link between pay and performance. Since the recently passed tax bill focused on substantially reduced corporate tax rates and will result in increased profits, companies who have funds available should consider whether their pay systems need an update in 2018.

-The POE Group
www.POEGroup.com