When the latest tax reform was introduced, companies immediately began calculating what it meant for their business. Compensation committees and their outside consultants went through a similar process to identify new rules that may affect how they structure executive compensation packages.
In short, the 2018 tax reform limited company deductions on executive pay over $1 million; yet, it subsequently granted boards more flexibility to use discretion within their compensation structures. In this episode, Annette Leckie, Partner with Meridian Compensation Partners, discusses the impact of the latest tax reform on executive incentives.
Now that a full year has passed since the latest tax reform, Leckie predicts that companies will start to make some changes to compensation in 2019, namely with their use of discretion. She attributes this trend to a number of forces, which she details in the episode. For example, the increased pressure on environmental, social and governance (ESG) issues is one such force that lends itself to “more discretion or softer objectives”.
In this episode, Leckie also reminds boards that investors’ focus on pay-for-performance alignment will remain strong:
Linking pay and performance is a fundamental principle that’s not going to go away. But using discretion and linking pay for performance are not mutually exclusive concepts. In fact, using discretion can actually tighten that link up.
Leckie explains that making adjustments at the end of the year can actually strengthen the relationship between the pay executives receive and their performance during the year; yet, compensation committees will need to have “the confidence and strength of conviction” to make these changes.
What happens when the board believes management has done all the right things, yet earnings, stock price, and TSR are down? Can it justify making payouts in that situation? In this episode, Leckie advises on these and other scenarios.