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6 Whipsaw Lessons about Pay and Tax Reform

The Tax Reform effort that is currently churning through the halls of Congress has been an eye-opener for executives and compensation professionals in the worlds of publicly-traded and pre-IPO companies. Both the original bill from the House of Representatives and the Senate included provisions under the heading of “Non-Qualified Deferred Compensation” that, if enacted, would have changed the landscape of total rewards. The bill included stock options, RSUs and, potentially, other forms of equity under the misleading heading.

The Monday after the House bill was released, November 6, 2017, I called it the Death of Equity Compensation. Within a few days, I reported that the offending provision had been stricken and Reports of Equity Compensation’s Death have been Greatly Exaggerated. Before that day was done, the Senate had once again put Equity on death row. Before I could write a pithy article, they had released it, on parole.

As of November 15, 2017, both the House and Senate bills have been amended to remove the troublesome sections on Non-Qualified Deferred Compensation.

Also, a new amendment may make some stock options and RSUs BETTER! The change may allow employees at private companies to defer the normal taxation on option exercises or the release of RSUs for five years. This requires a gamble by the employee, but it is one that many will happily take. A version of this amendment received COP support in 2016, so it may be here to stay, or not. (Learn a bit more here.)

So, we are all good, and the compensation world is back in order? Perhaps not. 

Six lessons we can learn from the most turbulent week in pay in many years.

1.     When it comes to legislation, read deeper than the media speaking points (quickly.)

None of the initial speaking points about Tax Reform included mention of equity compensation. Law firms and compensation consultants brought attention to the issue quickly.

2.     A world without equity compensation is a world with crippled start-ups.

Venture capital investors, start-up organizations, and others quickly pointed out that without equity compensation, our start-up model could not exist.

3.     A world without equity compensation is one where executive pay must be completely reimagined.

When investors demand a link between company performance and executive compensation, they generally lean on equity compensation. While not perfect, there is currently no other acceptable toolset to replace equity compensation.

4.     Swift response can result in quick corrections.

The near immediate call-to-action, for a topic not even mentioned by the media, seemed to do the trick. In about a week, equity compensation went from the chopping block to maybe receiving new lifeblood. That’s impressive.

5.     Massive changes to the tax code require time.

The idea of having less than 60 days to prepare for tax rules that would fundamentally change the most critical elements of pay seemed, and is, ridiculous. Compensation philosophies would need to be changed. Compensation Planning that is already in action would need to start from scratch. Software that supports exercises, vesting, and associated tax calculations would need to be reprogrammed. Innumerable reports would need to be updated. Even a year may push the edges of reality. Two months, during year-end, is laughable.

6.     The people in Washington don’t understand equity compensation.

Equity compensation may have a terminal illness. Many people in politics see equity compensation as a tool for mega-wealthy to avoid paying their fair share. Others see it as a way for people to make more than they “should.” I think the more significant issue is a fundamental misunderstanding of how and why equity compensation exists and works. This gives us a unique challenge and a fascinating opportunity.

As compensation professionals, it is our responsibility to educate people about our tools. Perhaps we have been a bit complacent over the past decade. The people who represent us, our companies, and our employees have an obligation to know what makes us successful. Those of you who have tried to teach yourself about equity compensation may have found it was not an easy task. Imagine if you were a politician and this was item 133 on your priority list!

It is time we put together an educational program designed just for those who have the power to change our laws. More importantly, we need to actively reach out to our political representatives and explain the importance of equity compensation, and how easily it can be broken with what seem to be simple, and perhaps reasonable, changes. There is no real need for hyperbole, just information.

If you’re interested in getting involved, let me know.

Equity Dilution is Like Drinking Great Whisky

Equity Compensation says: "Reports of my death have been greatly exaggerated"