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US tax reform: Rethinking executive remuneration

US tax reform: Rethinking executive remuneration

Ablean Saoud and Ben Travers discuss how the recently introduced US tax reforms will impact executive remuneration.


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Effective from 1 January 2018, reforms of the United States (US) tax system under the Tax Cuts and Jobs Act will impact executive remuneration.

This reform will impact both US domestic companies as well as foreign companies operating in the US. A few key considerations and suggested action points are below:

Limitation on corporate tax deduction for excessive remuneration

The limitation on corporate tax deductions for excessive employee remuneration for public companies has been widened as follows:

  • The definition of a “covered employee” has expanded. Previously the limitation impacted Chief Executive Officers (CEOs) and their three highest paid officers, excluding the company Chief Financial Officer (CFO). The section now includes the CFO as a covered employee, as well as any former covered employee, irrespective of retirement and even death. 
  • Repealing of the exception for “performance-based compensation”. Companies were formerly able to avoid the limitation by remunerating executives through options or equity awards that were tied to specific performance criteria. Repealing of this exception means all compensation is now counted toward the $1,000,000 deduction limit.
  • Expanded scope of “public” companies. The scope of corporations the limitation applies to is expanded to include foreign companies with mandatory Securities and Exchange Commission (SEC) filings. This includes certain foreign companies with US American depositary receipt (ADR) listings. For affected foreign companies, the deductibility to the US business of the remuneration costs of executives may be limited.

We are already starting to see the impact of this change in the market as a number of US public companies, including Netflix, have started to announce restructuring of remuneration packages for executives by increasing base salary and lowering equity-based bonus component.

Action point: Determine whether your organisation is impacted by the expanded definition and whether your remuneration arrangements need to be reviewed.  

Timing of corporate tax change for fiscal year-end companies

Australian companies operating in the US on a fiscal year-end will not be able to fully access the new lower corporate tax rate until their next financial year starts in July 2018. This presents an opportunity for companies to review their remuneration arrangements with a view to potentially accelerating the deduction of certain executive remuneration costs.

Locking in the deduction in the current fiscal year could provide an additional benefit of up to 7 percent, due to the drop in corporate tax rates.

Action point: Evaluate the potential to accelerate corporate tax deductions for certain compensation items.  

Impact to metrics of FY18 performance plans

The lowering of the US corporate tax rate from 35 percent to 21 percent has meant that many organisations have had to remeasure and adjust accordingly their deferred tax assets and deferred tax liabilities. This issue was compounded by the timing of the enactment of the laws in late December 2017. This created a major challenge for publicly listed companies in trying to get accurate disclosures to the market in a timely fashion.

For organisations making one-off adjustments to their FY18 financials there is a flow-on impact to employees and executives with remuneration performance hurdles linked to profit and the financial performance of the organisation.

Action points: Consider how any one-off balance sheet adjustments will impact the measurement for FY18 performance plans and whether an adjustment to the plan would be appropriate.

While the focus of the recent US tax reform wasn’t executive remuneration, the changes outlined above are most likely the first of many flow-on affects in this space as the reforms come into practice. Organisations operating in the US or with a connection to the US should continue to evaluate their remuneration frameworks as the market and industry digest the tax reforms and their impact.

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