IRS Could Jam Golden Parachutes

The Internal Revenue Service last week filed a tax ruling that could end the practice of granting golden parachutes to top CEOs who are pushed out amid corporate failures, Financial Week reports.

Under the rule, known as Section 162(m), compensation of more than $1 million each to the CEO and three next top-paid executives, aside from CFOs, is not deductible unless it is performance-based or tied to such a target as earnings growth. Though it is not stated it in the ruling, the IRS has allowed arrangements to be considered performance-based for several years, even if they had a provision that allows for the payment, regardless of achieving a financial goal, according to FW.

The IRS – contradicting previous interpretations – has decided that any pay award, such as an annual bonus, restricted stock or most other long-term incentive plans, that is part of an arrangement with such a golden “good-bye” provision fails to qualify as performance-based, and is subject to the $1 million deduction limitation for non-performance-based pay.

“The bad termination provision infects the award before termination,” Steve Root, managing director at Steven Hall & Partners, told FW. “So if you have terms in a contract that say that in the event a guy gets fired by the company, we’ll pay it out anyway regardless of performance, they blow the status of the award being performance-based compensation.”