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The Perfect Storm Swirling Around Executive Compensation and the Related Corporate Governance
Greta E. Cowart
The Evolution of the Regulation of Executive Compensation
When the financial crisis began in 2008, an outcry came again regarding executive compensation and incentive compensation. The outcry over the incentive and executive compensation led to a new group of legislative and regulatory changes that are the next step in a longer series of changes over the last twenty-five years during which the regulation of executive compensation has evolved. The SEC made regulatory changes to executive compensation disclosure and/or governance in 1992, 2006 and most recently through the proposed rules published in the Federal Register on July 17, 2009.1
The Internal Revenue Service entered the regulation of executive compensation first when Congress enacted the golden parachute provisions in the Tax Reform Act of 19842 and again when Congress added the $1 million cap on the deductibility of non-performance based compensation in 1993 in Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Following Enron and the related market collapse from the dot.com era, Congress again acted against perceived abuses and added Code section 409A regulating nonqualified deferred compensation which was adopted in 2004 in the American Jobs Creation Act of 2004.3 The Internal Revenue Service further completed the picture by issuing the final regulations on Code section 409A which became effective January 1, 2008 and required amendments by December 31, 2008.4
In addition to the government’s regulation, the Financial Accounting Standard Board issued Statement 123(R) in 2006 requiring companies to estimate the amortized expenses of stock options on their income statements and has continued to regulate the disclosure of post-retirement medical and other benefit obligations under FASB Statement 158. All these measures are ways in which executive compensation has been subject to increasing regulation and disclosure requirements.
To read the full article, please click on the linked PDF below.
1 74 Fed. Reg. 35706.
2 P.L. 98-369.
3 P.L. 108-357.
4 72 Fed. Reg. 19234 (April 17, 2007).