The Internal Revenue Service (IRS) recently issued a notice that excludes the CFO from the group of executive officers who are considered covered employees under Section 162(m) of the Internal Revenue Code. Under 162(m), a public company may not deduct more than $1 million of executive pay for each covered employee each year, unless the compensation is performance-based. Besides specifically eliminating the CFO, the IRS also reduced, to three from four, the number of individuals in addition to the company’s CEO who are considered covered employees.
The reason? The disclosure rules upon which the IRS code was based were changed. When Congress first adopted the $1 million cap on executive pay deductions in the 1990s, it based its list on the Securities and Exchange Commission (SEC) rule specifying which executive salaries had to be disclosed by a public company in its proxy. At that time, a company had to list the compensation of its CEO and the next four most highly compensated officers. Last year, however, the SEC changed its disclosure standard to require companies to disclose the pay of not only the CEO, but also the CFO and the next three most highly compensated executives. But while the SEC rule changed, the IRS code cannot change without Congress passing new legislation.
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