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Companies should be cautious when drafting executive compensation agreements under a new federal tax provision that regulates deferred compensation plans, according to panelists at today’s Minority Corporate Counsel Association panel entitled, “Executive Compensation: What’s Changed in Light of Corporate Scandals?”
Jenner & Block Partner S. Tony Ling, who served as a panelist at the discussion, advised the attendees to seek outside legal counsel when dealing with the complex tax provision, which sets out rules for how and when executives can elect to receive deferred compensation, as well as the form in which they can receive such payment.
Mishandling the tax requirements outlined in the provision could be extremely costly for the executive, he added, since violations of the law can result in the recipient paying an excise tax equal to 20% of amount of deferred compensation.
The panelists noted that many of the new rules were introduced in light of recent high-profile corporate scandals and alleged executive wrongdoing.
For instance, Mr. Ling said the purpose of the new tax law is to prevent what is known as an "acceleration" of compensation deferrals when an exective leaves a company. For public companies, under the new rules, an executive can no longer "leave his company one day and receive the lump sum of his deferred compensation the next day," he said, because the new law stipulates any payment of deferred compensation must be subject to a six month delay.
While companies should realize that this new law mandates a change in the way they look at executive compensation agreements, they’ll "generally be fine" if they can show a good faith compliance with the new rules, Mr. Ling concluded.
The panel also included Michael A. Lawson of Skadden Arps, Slate, Meagher & Flom LLP and Gregory T. Alvarez of Jackson Lewis LLP.