Ablean Saoud and Ben Travers discuss how the recently introduced US tax reforms will impact executive remuneration.
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:
The limitation on corporate tax deductions for excessive employee remuneration for public companies has been widened as follows:
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.
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.
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.