On February 21, 2008, the IRS issued its widely-anticipated guidance, Revenue Ruling 2008-13, regarding the impact of certain severance provisions on performance-based compensation under Section 162(m) of the Internal Revenue Code. This guidance clarifies the position taken by the IRS in a private letter ruling released on January 25, 2008. In the 2008 ruling, the IRS reversed its previous position regarding an important exception to one of the requirements that must be met in order to qualify compensation as “performance-based” under Section 162(m). Specifically, compensation will not qualify as “performance-based” if it may be paid upon termination of service without cause or resignation for good reason, or upon a voluntary retirement, and without regard to actual performance.

On February 21, 2008, the IRS released a revenue ruling regarding the treatment of certain performance-based compensation under Section 162(m) of the Internal Revenue Code (“Section 162(m)"). This revenue ruling restates a private letter ruling released January 25, 2008, and reverses prior IRS private letter rulings. This Update discusses the important issues that publicly held companies should consider regarding this new ruling and Section 162(m).

This proxy season, publicly held companies should be thinking about the following important issues relating to Section 162(m) of the Internal Revenue Code of 1986 (“Section 162(m)”), as discussed in this Employee Benefits and Executive Compensation Update.

On June 4, 2007, the IRS issued Notice 2007-49, which changes the group of executive officers who are considered covered employees for purposes of Section 162(m) of the Internal Revenue Code. The Notice specifically excludes the chief financial officer (CFO) from coverage under Section 162(m) and provides that the only individuals who will be considered covered employees are the chief executive officer (CEO) and the three highest compensated officers (other than the CEO or CFO). Previously, the CEO and the four other highest compensated officers were subject to Section 162(m), and the CFO was not automatically excluded.

On June 4, 2007, the IRS issued Notice 2007-49 which provides guidance for identifying “covered employees” for purposes of Code Section 162(m)(3). For several months, the IRS indicated it would address the uncertainty related to the status of CFOs as “covered employees,” resulting from the Securities and Exchange Commission’s adoption of final rules relating to disclosure of executive compensation. This update discusses the IRS’ amendment and clarification of the term “covered employees” as defined under Code Section 162(m).

Employers sponsoring retirement plans and deferred compensation arrangements should be mindful of certain actions that must take place by December 31 of this year, as well as new requirements and opportunities effective at the beginning of the 2007 plan year. Few of these action items entail major undertakings, but employers should review their plans and policies to ensure that appropriate actions are taken to comply with new requirements.

On September 19, 2006, the SEC’s Office of the Chief Accountant (OCA) issued a letter that provides guidance regarding accounting for stock options in historical financial statements of public companies. OCA’s guidance relates to accounting for options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), which all public companies could apply in fiscal years beginning prior to June 15, 2005. APB 25 therefore governs the accounting treatment for many of the option grants now under investigation.

Hardly a day goes by without an incendiary story in the press depicting the perceived excesses of executive compensation or the purported well-upholstered lifestyles of a select group of corporate executives: enormous pay and perquisite packages, problematic option dating practices, compensation committees packed with directors who owe allegiance to CEOs, unrestrained personal use by executives of corporate aircraft, stunning severance packages for supposedly failed executives and reports of “corporate kleptocracy” and other allegations of nest-feathering by executives and directors.

On August 11, 2006, the U.S. Securities and Exchange Commission (SEC) adopted major amendments to the disclosure requirements for executive and director compensation in a 436-page release. These amendments clarify and expand the existing compensation tables, and require extensive narrative disclosures to supplement the tabular information. Companies generally must comply with the amendments (1) in Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006, and (2) in registration statements under the Securities Act or the Exchange Act, proxy statements and information statements that are filed on or after December 15, 2006 and that are required to include compensation and related party transaction disclosure for fiscal years ending on or after December 15, 2006.

In conjunction with the adopted amendments to the executive and director compensation disclosure requirements (see SEC Update "SEC Adopts Major Changes to Compensation Disclosure Requirements"), the U.S. Securities and Exchange Commission also modified Form 8-K and amended the disclosure requirements for related party transactions, corporate governance matters, and security ownership of officers and directors. As part of the compensation disclosure release, the SEC also adopted amendments to other disclosure provisions relating to executive and director compensation. The modified disclosure requirements relate to compensation disclosures in Form 8-K reports, related party transactions, corporate governance matters, and security ownership of officers and directors. The Form 8-K revisions will apply to triggering events that occur on or after the 60th day following publication of the revisions in the Federal Register, expected later this month. Companies generally must comply with the other modified disclosure requirements (1) in Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006, and (2) in registration statements under the Securities Act or the Exchange Act, proxy statements and information statements that are filed on or after December 15, 2006 and that are required to include compensation and related party transaction disclosure for fiscal years ending on or after December 15, 2006.

Recently, many accounting firms have alerted their clients to the application of FAS 123(R) in the context of equity restructurings (e.g., stock splits and stock dividends). These firms have noted that the discretionary adjustment of equity compensation under plans and arrangements that do not provide for automatic adjustments upon an equity restructuring may result in an additional compensation expense.

At an open meeting yesterday, the SEC unanimously adopted new rules relating to executive compensation and related party transaction disclosure. The new rules will be effective for the upcoming proxy season. The actual text of the final rules is not yet available. Based on the statements made during the open meeting and the SEC’s press release, it appears the SEC has adopted the rules substantially as proposed in January, with some notable exceptions:

In November 2005, a publicly-traded company announced the resignation of three of its top executive officers following an SEC investigation into the backdating of stock option grants. Since then, more than 20 companies have announced the formation of independent committees to investigate option granting practices or the existence of a government investigation into their option grants.

Springtime, in addition to bringing back flowers and birds, also brings forth many companies' proxy statements, including information on CEO compensation. It's a signal for the business press to get to work reporting the details of what appear to be the highest executive pay packages.

Options to buy company stock (“stock options”) and rights to share in the appreciation of company stock (“stock appreciation rights” or “SARs”) are a tax-advantaged way to reward key employees without having to pay out additional current compensation. However, proposed regulations to newly enacted §409A of the Internal Revenue Code impose restrictions on stock options and SARs. Failure to satisfy §409A results in immediate taxation of the value of the stock options or SARs, imposition of imputed interest, and a 20% penalty tax.

This Update discusses a year-end reporting requirement and the associated January 31 deadline for businesses that have granted incentive stock options. This Update will be of interest to those businesses that have granted incentive stock options.

This Alert will serve as a reminder of certain year-end reporting requirements imposed with respect to incentive stock options and employee stock purchase plans.

Employers sponsoring retirement plans, welfare plans and deferred compensation arrangements should be mindful of certain actions which must take place by December 31 of this year. Although few of these action items entail major undertakings, employers should review their plans and policies to ensure that appropriate action is taken to comply with the laws or to take advantage of new rules that can ease administrative burdens.

We expect recently-issued proposed regulations under Section 409A of the Internal Revenue Code, along with recent changes in financial accounting rules and practices, to significantly and immediately affect the way in which private companies set the exercise prices for their stock options and values for other stock-based compensation.

Recently-issued proposed regulations under Section 409A of the Internal Revenue Code provide some guidance and flexibility for public companies in setting the exercise prices for their stock options, base prices for stock appreciation rights (“SARs”), and values for other stock-based compensation.

This update discusses the FASB's position that the grant date for a share-based payment award is established after the approved grant is communicated to the employee. This update provides a guide of how to determine the grant date under FASB Statement Number 123(R).

As reported in a previous Cooley Alert, FAS 123(R), which requires that the compensation charge for most equity-based awards be measured on the “grant date” of that award, states that a “grant date” occurs when there is a “mutual understanding” of the key terms and conditions of stock awards. The Financial Accounting Standards Board (FASB) initially took the position that a mutual understanding could not occur until an award’s key terms and conditions were communicated to the employee receiving the award.

The FASB is at it again. As reported in a prior Cooley Alert, soon all companies, public and private, will need to account for share-based payments (e.g., stock options) based on their fair value at the date of grant. As many companies struggle to determine how to measure the fair value of a share-based payment, they will now also have to focus on when to make that measurement.

The SEC’s interest in the area of executive compensation disclosure is evidenced by enforcement actions against The Walt Disney Company and General Electric Company, a settlement with Tyson Foods, and noteworthy comments from SEC Commissioners and staff. Each of these developments highlights how important it is for public companies to develop and maintain sound practices and processes to ensure full compliance with the SEC’s executive compensation disclosure requirements.

Yes, it pays to be friends of those who pay you, or even to be friends of their friends. That, roughly speaking, is the conclusion of a study analyzing the impact of director relationships on the compensation of chief executive officers.

Yesterday, the IRS announced a settlement initiative affecting executives (and their companies) that participated in certain tax avoidance transactions involving stock options or restricted stock.

The 2004 proxy season is threatening to create a "perfect storm" for employee, and particularly executive, compensation.