Wednesday, February 27, 2008

You Rock, IRS

Thanks to Hillary Clinton, we all know who gave Barack Obama sound bites for his speeches. But what genius has been feeding lines to folks at the SEC? Last week an SEC official devoted an entire speech – in Australia*, no less – to a strained analogy between the 1962 western, The Man Who Shot Liberty Valance, and...I don’t know, something or other.

SEC Commissioner Kathleen Casey also waxed clumsily metaphorical recently. Speaking at a conference, she commented that when Congress has tried to use tax laws to tamp down executive compensation, compensation has simply “shifted” elsewhere “like a rock on jello.” (I keep wondering if she meant to say "jello on a rock." Would a rock on jello really shift? Wouldn't you need a whole lot of jello and a really small rock? Anyone out there looking for science project ideas?)

Commissioner Casey may soon be eating her words. The very day she delivered that speech, the IRS threw Proxyland (the place, not the blog) into a tizzy by deciding to re-interpret a section of the Internal Revenue Code that’s been sitting around, not doing terribly much, since Bill Clinton signed it into law in 1993. I’m talking, of course, about the famous Section 162(m), which says you can only deduct a paltry $1M per year for a top executive’s compensation, unless (nice big exception here) it's completely "performance-based.”

Last week, backing up a less formal ruling it issued in late January, the IRS officially confirmed its new tough guy position, which basically says: If an executive's contract calls for bonuses tied to performance, but also guarantees him freebie bonuses to be paid out as severance if things don't work out - no matter how he's performed - then the bonus program isn't entirely performance-based. So, sorry, no tax deductions. Did that make any sense? The tax code is no fun to blog about.

Even though the IRS was nice enough to grandfather all existing contracts, the immediate result of this ruling will be that law firms will reap their own "performance-based compensation" for re-writing massive numbers of bigshot employment agreements. One firm even suggests that “most companies will want to eliminate these termination and retirement accelerations from their plans and agreements.” If that’s right, there's a chance that Commissioner Casey, and others who don’t believe in the power of legislation to affect executive compensation in a meaningful way, could be wrong.

If this tax ruling inspires companies to hand out severance payments in a less carefree manner, I'll have one less thing to complain about here. In which case I'll have to find my lab partner, get out my rock and my jello, and figure out how to shift my cranky attention to something else.
*Coincidentally, this very blog just made news in the Land Down Under.

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