Sen. Bill Nelson (D-FL) has introduced legislation that would amend the tax code to create special rules for executive compensation paid at “systemically significant” financial institutions. The Wall Street Compensation Reform Act of 2010 (S. 3149) would condition an institution’s eligibility for tax deductions on ending certain compensation arrangements and adopting new, long term compensation standards. A financial institution would be considered “systemically significant” if it engages primarily in activities which are financial in nature (as determined under section 4(k) of the Bank Holding Company Act of 1956), and which either owns or controls assets greater than $25 billion, or owns or controls assets greater than $10 billion and maintains a ratio of debt to equity which is greater than 20 to 1. The bill’s provisions would apply to high-level executives and other employees whose actions affect the institution’s risk exposure. Employees that earn more than $1 million in applicable remuneration are presumed to fall under this category, unless they submit information returns describing their roles and responsibilities and the reasons why their actions within the company do not have a material impact on the taxpayer’s risk exposure.

Among other changes, the bill would condition the tax-deductibility of executive compensation arrangements on the following:

• Compensation over $1 million would be nondeductible unless it is performance-based;
• At least half of performance-based compensation must vest over a period of five years or more;
• At least 50 percent of the performance-based executive compensation paid at public companies must be in the form of employer stock;
• Certain executives would have to forfeit this remuneration if the taxpayer is required to prepare an accounting restatement due to material noncompliance, as a result of misconduct, with any financial reporting requirement under federal securities laws; and
• Employees would be prohibited from engaging in personal hedging strategies, such as compensation insurance.

These and other provisions would be incorporated into an existing section (162(m)) of the tax code. This bill has been referred to the Senate Committee on Finance.
 

Photo credit: MBPHOTO, INC.