Transcript: Ask the Experts: Performance Awards
Ask the Experts: Performance AwardsSubmit your challenges with performance awards for this panel of experts to address! Thursday, February 16, 2017 As grants of performance awards increasingly become the norm, at least for executives, the award types and metrics continue to evolve. Blended designs, payout caps and questions around grant sizes continue to create challenges in administering, accounting for and reporting on these awards. We've assembled a team of experts to respond to your questions, as well as questions we encounter again and again in our NASPP Q&A Discussion Forum. Experts from the following firms will be addressing your questions:
Answers to Questions Submitted in AdvanceKathleen Cleary, CEP, Education Director, NASPP: We had several questions about valuing performance awards and amortizing the expense. I'm going to ask Terry Adamson, from Aon Hewitt, to talk generally about valuation methods for performance awards and how the expense should be amortized, as well as establishing a grant date. Terry? Terry Adamson, CEP, Aon Hewitt: Prior to any valuation or expense amortization, the first thing we need to do is to determine an accounting "grant date". Generally, the accounting grant date will occur when all shareholder and board approvals occur, assuming that everyone has a mutual understanding of the terms and conditions. And prior to any thorough discussion on valuation/amortization, we first need to classify the 2 big genres of performance awards: 1) market conditions (based on stock price or TSR), or 2) performance conditions (based on any internal company metric other than TSR). The valuation and amortization are significantly different between these 2 genres. Let's start with the easier of the 2, market conditions, when the conditions are contingent on stock price—either on an absolute or relative basis. I describe this as the easier of the 2 because it really only requires the calculation of a "fair value" using a valuation technique and this is typically done via a Monte Carlo simulation. And to be fair, this valuation is typically going to be done by an independent 3rd party as most companies prefer to have independence. But once that fair value is calculated, then the accounting is very similar to stock options, in that it is amortized over the requisite service period (from the grant date to the completion of the performance period). I also describe this as easier because it is a very constant accrual pattern—regardless of what the ultimate earnout is due to the market condition, there will be no change in amortization. This is because the fair value already captures the probability of different earnouts within it. As mentioned, this is very similar to stock option accounting, and the Black-Scholes model. Now, let's talk further about "performance conditions", when the metric is some internal operational metric. This is much easier up front, because there is no financial theory that can handle this valuation. Therefore, ASC718 says, let's just use the stock price on the accounting grant date as the fair value. Then let's amortize our "best estimate" of the expected shares earned out at the end of the period based on that fair value. Each reporting period throughout the award, a company must make its best estimate and take a cumulative catch up reflecting any changes in that amount. I describe this as more challenging because it creates a much more volatile expense recognition. That being said, the great benefit is that it allows for a reversal of compensation expense if no awards are earned out, but then a substantive incremental charge if additional awards are earned out. The glass is half full, or also half empty. Now, I just described situations where companies have only a single metric—or they are independent of each other. It gets even trickier if companies have multiple metrics that could potentially be integrated with each other. Cleary: One specific question we received, Terry, was from a company that grants performance awards with an initial 3-year service condition and then a market condition, which cannot be met until after the service condition is completed. The awards would pay out based on the market condition, between 0% and 150% of target. How should these would be valued and expensed? Do they need a Monte Carol simulation? Adamson: Interesting question, Kathleen. It is rare to see an award as you described. From a governance perspective, most investors would also care about the stock price appreciation during the 3-year initial service period, so why not include that in the mix? But here goes on a response: yes, this would still require a Monte Carlo simulation. We would simulate stock prices starting at Time 3, and simulate them to the end of the performance period. The Monte Carlo simulation would include assumptions like "expected volatility", and the "risk-free rate of return", and potentially comparable assumptions about relative peers as well. The Monte Carlo simulation would then yield a fair value which would then be amortized from the accounting grant date to the end of the requisite service period. Cleary: And then we had several questions about how the expense should be adjusted for changes in the attainment of the market condition. Would the fair value per share be fixed at grant and then adjusted prospectively in the performance period between 0% and 150%? Adamson: Another good question. Assuming that the award has "equity treatment" under ASC718, then there would be no further changes in the expense amortization, regardless if it earns out at 0% or 150%, because the fair value already considers the probability of these payouts. Therefore, the expense amortization becomes very level and predictable. I've always believed this to be the "purest" accounting treatment. Ultimately, what we are trying to derive with these valuations is the compensatory value of the instrument—which is being used to pay people. Regardless if the award earns out, the consumption of the asset—the people—still occurs. And from a purely accounting theory standpoint, then there should be accounting charges that occur as well. Cleary: Now I'll turn Josh from Compensation and Benefits Solutions, with a different topic. Josh, can you give us some general information about doing an "Equal Pay Analysis"? And then to address a specific question that came in, which is: As part of our annual LTI grant to our management team (Directors, VPs, and SVPs, but excluding EVPs), our company is looking to implement "discretion" or an "LTI Pool", such that a leader could differentiate the annual LTI grant to his/her employee team. Our general approach is that an EVP has an "LTI pool" that they can use to make the annual grant to their employees, differing up or down the amount by person based on that employee's performance, 9-box rating, retention risk, etc. The differentiation could be +/- 25% to 50% from the targeted grant value for the grade. Using an example for a Vice President with an annual grant value of $100K, a leader could grant anywhere from $50K to $150K to a VP. Can you comment on whether you believe this company should perform an "Equal Pay Analysis" on this program? Josh Henke, CECP, CCP, Compensation & Benefits Solutions: There are two parts to this question. First, what is an "Equal Pay Analysis"? Two federal statutes prohibit gender-based differences in pay: the Equal Pay Act of 1963 (EPA) and Title VII of the Civil Rights Act of 1964 (Title VII). The EPA prohibits differences in pay that are based on gender. In 2016, multiple states (California, New York, Massachusetts, and Maryland) passed new laws essentially lowering the bar for equal pay lawsuits. More states will likely be coming down the pipeline. All forms of pay are covered by this law, including salary, overtime pay, bonuses, stock options, life insurance, vacation and holiday pay, hotel accommodations, reimbursement for travel expenses, and benefits. If there is an inequality in wages between men and women, employers may not reduce the wages of either sex to equalize their pay. Once the bar has been set, it is set. Now, how does this relate the question asked of differentiation in long-term incentive awards based on a leader's discretion? We are currently involved with companies in California dealing with these very issues now. As a matter of best practice, a company needs to be able to defend that compensation decisions are not based on gender. If you are providing discretion within your compensation programs, in this case long-term incentives, you may open yourself up to these types of claims by participants. As with any proper compensation plan governance, the need to document the "why" and "how" plans are administered will be critical. While I'm a fan of discretion in compensation programs allowing leaders to differentiate between low and high performers, participants will always have the right, under the law, to question the decisions made by their leaders. I believe going forward we will see many companies conducting equal pay analyses to ensure their compensation programs are fair. The largest exposure to proactively conducting these analyses will be how the company reacts to the results. The company needs to be prepared for the results and have a game plan to address the issues. Inaction could end up costing the company even more down the road. Cleary: Okay, let's turn to Doreen, from Shearman and Sterling. Doreen, with ASU 2016-09, the FASB relaxed its guidance on withholding of shares to pay taxes, allowing companies to withhold up to the maximum rate and not trigger liability accounting. Can you talk a little bit about this change and various ways for companies to manage withholding rates, as well as best practice? Doreen Lilienfeld, Shearman & Sterling: In March of last year, the FASB issued Accounting Standards Update (ASU) 2016-09 which modifies the exception to liability classification of an award when an employer uses a net-settlement feature to withhold shares to meet the employer's tax withholding requirements. Prior to the modification, the exception only applied when no more than the number of shares necessary to meet the employer's minimum statutory withholding requirement was withheld. Under the modification, however, equity classification (as opposed to liability classification) will be permitted so long as any net settlement to cover tax withholding does not exceed the maximum individual statutory tax rate in a given jurisdiction. The purpose of this amendment is to provide relief to companies with employees in multiple taxing jurisdictions. Previously, employers had to track the minimum statutory requirement for each grantee. Under the new guidance, the maximum rate is determined on a jurisdiction by jurisdiction basis (even if the rate exceeds the highest rate applicable to a specific grantee.) Cleary: We received a specific question from a company that includes language in their grant agreements allowing the participant to elect their Federal Tax Withholding percentage in their acceptance, and then does not allow changes, unless the supplemental income threshold is reached. Do you have any thoughts for this company relative to this practice? Lilienfeld: Employers still have to be mindful of the IRS. Under current treasury regulations, employees may not direct an employer to apply a particular rate of withholding generally, or to a particular payment. The employer must base any rate other than the optional minimum flat rate on the employee's W-4. If an employee would like to increase his or her withholding on a supplemental payment they can submit a new W-4, keeping in mind they will have to submit a second W-4 to revert withholding for their regular wage payments. And just to make sure everyone knows what is meant by the supplemental income threshold, the IRS provides that if an employee receives supplemental wage payments in excess of $1 million in a calendar year, the mandatory withholding for the additional amounts is a flat rate of 39.6%. One final minor point is that the exchanges do not require a shareholder vote to modify a plan to increase share withholding, so long as any additional recycling of withheld shares is limited to unissued shares. Cleary: Let's go back to Terry with the next question. When it comes to performance awards, diluted EPS can be more challenging to calculate. Will you give us some general information on this topic and then we can address the specific questions? Adamson: This is one of the more challenging components of performance awards, both from a conceptual standpoint and an administrative standpoint. Performance awards are considered a contingency in applying the guidance in ASC Topic 260. At the end of each reporting period, the Company is required to measure the quantity of awards paid out as if the performance period had ended. The Company then applies the Treasury Stock method to the shares considered issuable based on that measurement. Now, where it can be tricky, is that a company may need to calculate a different quantity of awards expected to vest under ASC Topic 260 than what is used for recognition of compensation expense under ASC Topic 718. For example, a company issues 100 PSUs that vest when annual revenues exceed $10,000,000. Even though the Company is recognizing compensation expense at target for ASC Topic 718 (which represents what the Company ultimately expects to vest), under the contingent share provisions of Topic 260, the incremental awards would not be included until the Company revenue exceeds $10,000,000 (which represents what would vest if the performance period ended today.) In my head, I draw the parallel here with underwater stock options which are anti-dilutive on the measurement date, however, are still being amortized for compensation expense. Cleary: We received a specific question regarding the impact of a company's 2014 PSU's that use the TSR metric. The first group that the company anticipates a return on will be vesting in May of 2017, using the 2016 year-end results. If they know what the return rate is for the future vesting, should they adjust the dilution of these shares since they know only a portion will vest or do they wait until the May 2017 vest date? Adamson: Yes, I would definitely adjust the dilution of these shares based on TSR as soon as you know what the actual earnout is. Cleary: There were also a couple of questions about when to include shares which will be earned upon the achievement of certain financial goals, but the award agreements stipulate that the awards will not vest until the achievement of the financial goal is certified by the compensation committee or the board of directors. Are these unvested awards includable in the calculation of dilutive EPS at each quarter end if the financial goals appear to have been met, but the committee has not certified? Adamson: Another good question here and there are facts and circumstance nuances that should be considered. But yes, I would recommend including these non-vested awards—assuming that the only required contingency is certification by the board. Therefore, assuming that the actual performance criteria is already achieved and known. Cleary: We received a couple of questions as to how to deal with this situation if the performance goals are met at 12/31 but the committee doesn't meet until March or later of the following year, which I think would be treated similarly? Adamson: Yes, include them. Cleary: Thanks, Terry. Josh, let me ask you the next question we received, about using predictive analytics to help in the goal setting process as it relates to LTI goals? In other words, analysts' estimates to project the probability of future performance outcomes? Can you explain what predictive analysis is and how it works? And then how you might apply it to your LTI programs? Henke: First, I'll describe the general premise of predictive analytics. In the most basic sense, predictive analytics are sets of data, metrics, or statistics used to predict or foresee potential outcomes (positive or negative) of implementing a process or program. Using current buzzwords, this is Big Data. Companies are starting to get smarter on applying this to performance management systems, talent management and now compensation programs. Establishing the right metrics for your incentive programs and then establishing the proper threshold, target and maximum performance levels are critical to any successful incentive program. Most management teams and compensation committees will annually battle this out in the boardroom. Management will come to the table with a proposal and the Compensation Committee pushes back saying the goals are too easy or in some cases too difficult. This applies to both short-term and long-term incentive plans. Both cases of goals being too easy or too difficult create different issues when it comes to assessing the need for retention in a down market or continued motivation in a rising market. While it's not highly prevalent in the boardroom for long-term incentives (yet), I think it will be there shortly. I consistently see Management Teams and Compensation Committee's deciding to use more performance-based vehicles which is where this would apply to long-term incentives by establishing proper performance metrics. The most common performance period for a long-term award is three years. Depending on the industry, setting a benchmark three years out can be extremely difficult. This is one of the reasons why relative long-term incentive metrics have become so common. When measuring against a performance peer group, it removes some of the predictive nature of setting long-term metrics as the company is measured against relative peer performance. If the metric is not relative, I think this is a natural fit for predictive analytics in long-term incentive programs. I've seen companies use very sophisticated models and analytics to predict financial metrics. At the end of the day, companies will always have the tension between management and the board in setting long-term performance goals. Keeping this human element is a sanity check on even the most sophisticated financial and computer models. Cleary: Thank you, Josh. If we could turn to you, Doreen, with a question from a company considering using a relative TSR or an absolute TSR metric for performance shares, and wrapping an umbrella plan for 162(m) purposes around these awards. If you could discuss 162(m) generally and how it applies to these awards, and then give this company some direction as to whether or not it would be detrimental to wrap an umbrella plan around these market based awards? Also, if there would be any ISS or Glass-Lewis concerns? Lilienfeld: As we all know, 162(m) provides that no publicly held corporation will be allowed a tax deduction for compensation paid to any covered employee if the amount of the compensation to the covered employee exceeds $1 million. The term covered employee generally means the named executive officers other than the CFO. An exception to this denial of deduction exists for compensation that qualifies as "performance based." I'm not going to discuss all of the requirements for compensation to qualify as "performance-based" but one requirement relevant to the question is that performance-based compensation must be based on an objective goal that precludes upward or positive discretion to increase the award size. Negative or downward adjustments, however, is permitted. An umbrella plan—or a plan within a plan—is a structure that enables a company to include positive discretion while maintaining the ability to take advantage of the full compensation deduction. Generally, the outer or umbrella plan will comply with 162(m) while the underlying plan has a separate performance metric that yields a payout below the maximum allowable under the umbrella plan. Therefore, after the performance period, the company can use positive discretion to increase the payout under the underlying plan so long as actual payouts are not greater than that which was approved by shareholders. Unlike stock options or SARs, the values of which are based solely on an increase in the value of the company's stock, the vesting of performance shares must be contingent on the attainment of an objective performance goal such as a TSR metric in order to constitute performance based compensation under 162(m). So, would it be detrimental to wrap an umbrella plan around the market-based performance awards and would ISS or Glass-Lewis have concerns? For 3-year performance periods, the inability to use positive discretion can sometimes be problematic due to the amount of uncertainty that exists. Frequently companies use alternative design such as annual goals or utilizing relative TSR. We have seen estimates that less than 10% of large companies with PSUs employ an umbrella approach with respect to PSUs. Part of the reason is that there may be variable accounting implications. ISS and Glass Lewis favor 162(m) plans so long as there is nothing egregious about them and we have never had a problem with a company instituting an umbrella plan. Cleary: Thank you, Doreen. Let's go back to Terry for some more valuation discussion. Terry, we received a question from a company who grants performance awards based on relative TSR and since there's a lot of volatility in the valuation, it causes large swings in grant sizes from year to year. Any ideas on how to mitigate the impact of the swings? Both from an accounting and an HR perspective? Adamson: Very good question, and I hear this one a lot. You've pinpointed one of the big challenges on Relative TSR awards. One challenge of Relative TSR awards is the concept of the "stub period". By this I mean the fact that frequently the accounting grant date occurs after the performance period has already begun. For example, the performance period begins on 1/1/2017, but the accounting grant date occurs on board approval in March. Therefore, during the interim 2-month "stub period", there is lots of TSR movement for both the company and the peers that is already occurring. Because the final fair value needs to include all known information to date, then it needs to include the TSR movements from January to March, and those TSR movements can create a bunch of volatility year over year. For example, if your company has performed well against your peers, then the valuation will go up materially. And if your company has performed poorly against your peers, then the valuation will go down materially. There are a bunch of moving parts in the valuation, but at a high level, rule of thumb impact to the stub period is 2% change in fair value for every 1% change in TSR, compared against the median of your peers. But that is super high level. Now, there are a few potential concepts to mitigate against these swings but none are easy: 1) Start the 3-year performance period on the accounting grant date, rather than the calendar or fiscal year. It is awkward but solves the problem. So, no great magic bullet here. One last word of caution—this becomes much more significant and important to pay attention to if you use the accounting value (which could swing with volatility) to determine the Target number of awards to grant. Cleary: Thank you, Terry. We've mentioned several times today TSR, relative TSR and absolute TSR as metrics, and metrics are certainly a critical component of performance awards. We received several questions around setting metrics and different metric types, so Josh, will you please give us some general information on metric types, goal setting and what you are seeing as the most popular metrics? Also what metric types are preferred by investors, as well as ISS and Glass Lewis? Henke: As with any trend in compensation, the pendulum swings across the spectrum year over year. Long-term incentive performance metrics are no different. Performance Shares have been the fastest growing vehicle over the last several years as external pressure from shareholders, institutional investor advisors like ISS/Glass Lewis and the SEC continue to demand a link between pay and performance. Total Shareholder Return has been a top contender for the most prevalent metric in long-term performance awards but the implementation and design of this metric has evolved as well. Relative total shareholder return has become a very common metric where TSR is measured against a performance peer group over time. Several years ago, and in volatile or cyclical industries, executives could still achieve a maximum payout of their award for delivering negative shareholder return if they were better than the rest of their performance peer companies. Shareholders and ISS did not like this, so companies have evolved into setting performance floors in their plans. This is an example of how metrics can be well intended on the surface but implementation can have unintended consequences. Other key long-term metrics include Profit measures (Earnings Per Share, Net Income, EBIT/EBITDA) and Capital Efficiency or Return On measures (Equity, Assets, Capital). The key is to figure out what your company is trying to motivate your executive team towards. Engaging shareholders, which are those that vote on Say-On-Pay, will always have some insight. Listening to feedback and then figuring out the best metric for your company is critical. Just because your peers are doing it should not be your only litmus test. Another trend is that companies are using multiple performance measures within their long-term incentive program. This eliminates an overreliance on one individual metric. Lastly, ISS has announced that they will include a standardized table comparing the company's performance across six metrics relative to the ISS-defined peer group. The metrics will be three-year Return on Invested Capital, Return on Assets, Return on Equity, Revenue Growth, Growth in Cash Flow from Operations and Total Shareholder Return. Companies and boards will likely be looking to these metrics going forward simply because of ISS' influence. Again, a company needs to determine what is the best metric for their particular situation. Cleary: Thank you, Josh. Let's move on to another topic that we got several questions about, developing and maintaining peer groups. How do companies choose peers and what happens if they stop trading? We'll go at this question from two different angles. Doreen, if you would discuss the work the compensation committee does with respect to peer groups, and then Josh, I'll ask you to discuss some other ways the company may potentially use peer groups. Doreen, let's start with you. Lilienfeld: At this point, the use of peer groups is all but mandatory for compensation committees. Both the SEC and ISS encourage its use. ISS for example, uses peer group data as part of its pay for performance analysis. Even though ISS's peer group is different than the company's, it takes into account the company's peer group. As we have seen in the recent cases concerning non-employee director compensation, an appropriate peer group can protect against charges that compensation payable to directors was not reasonable. This is important in those instances where the business judgment rule does not apply because directors were interested in the transaction. This is an issue that can also arise when controlled companies make compensation decisions. Henke: There are distinctions between a compensation peer group and a performance peer group. A compensation peer group is typically set based on relative size and industry where a performance peer group may incorporate other larger/smaller industry players that you directly compete against but may not be appropriate for the compensation peer group. From the standpoint of ISS, their defined-peer group is tightly controlled by relative size and a company's GICS code. They will be measuring financial performance against this peer group. Cleary: With regard to maintaining peer groups, what happens if they are no longer publicly traded? What happens in the calculation? Henke: For performance peer groups, you will likely run into the scenario where a peer company files for bankruptcy, is delisted, or acquired. Grant agreements, if drafted properly, should address these scenarios. Sometimes, the agreements provide that the Compensation Committee has the discretion to handle these occurrences and what to do with the peer company. If the occurrence is due to management responsibility like bankruptcy or delisting, some companies will drop the peer to the bottom of the peer group. If the occurrence is due to M&A activity or Spin-off, they will simply be removed from the peer group if the new company does not closely resemble the previous. Cleary: Ok, I'm going to give all of the panelists a little breather, and go ahead and take the next question myself, which is more related to administration. I see this question pop up from time to time on our Q&A Forum on the NASPP website, so it seems to be something that our members encounter periodically. The question is, when you're granting performance awards, with a range of payouts, maybe 0 – 150 or even 200%, how do you manage your share pool? I think the really prudent way to manage your share pool is to reserve at the highest possible payout. You don't want to designate only enough shares to pay out at 100%, and then suddenly something amazing happens and you're going to pay out at 200%. And you don't have enough shares. You can go back to shareholders and ask for more, but what if they don't approve? And how long will it take to get the shares approved and registered to be issued under the plan if that's needed? By reserving at the maximum possible payout, you will avoid the potential of not having enough shares to reward the maximum achievement. Ok, for Josh, Doreen mentioned communication earlier, will you talk a little more about communicating performance awards and goals to employees and executives? And what are companies doing to communicate ongoing performance for their awards? Henke: Communication of performance awards has been one of the biggest weaknesses of performance equity over the last 10+ years. Truthfully, I have heard too many stories of performance awards in which the executives have no idea of what the earn out is until the end or near the end of the performance period—which isn't driving long-term behavior at all. Any incentive program really needs regular and consistent measurement and communication to maximize the incentive and the appreciation of the award. However, the measurement and communication of performance awards is not easy by any means. To start with, internal performance metrics are not always publicly available, and frequently the internal performance metric will have non-GAAP, non-reported adjustments to them, especially with relative measurements. Because of this, the disclosure of this information may be not allowed under SEC rules. Therefore, it may be required to hold off on certain communication about internal performance conditions until after reports are filed with the SEC. That being said, we believe best practice is to communicate regularly and as early as possible allowable under SEC disclosure rules. Now, with respect to performance conditions based on stock price or TSR—either relative or on an absolute basis—this is much easier, since it is already public information. We know of many companies who build automated solutions that track the expected earnout on a daily basis. We find that solutions like this truly create a transparent visual of the award at the fingertips of the holders, and therefore raise the perceived value of the incentive. It appears that the industry as a whole has put much more emphasis on communication over the last several years, and I have seen some firms develop videos and other types of collateral to enhance the education and communication of performance awards. I imagine that evolution will continue over the next several years. As it relates to Board communication which we should not forget, Compensation Committees regularly have a page in their board books showing the status of the executive teams' long-term incentive performance awards. This allows the Committee to keep an eye on the expected level of payouts, level of "handcuffs" or retention on the executive team, and stay ahead of any optics issues resulting in award payouts. Cleary: Thank you, Josh. One more question that came in, and I'll ask Doreen to address this one. We received a question about minimizing the impact of 280G on performance share vesting for a change-in-control, can we talk generally about 280G a bit and then discuss if there are ways to minimize the impact on performance share vesting when there's a change in control? Lilienfeld: Generally speaking, Section 280G of the tax code denies a deduction for excessive compensation that is contingent on a change in control and that is paid to what are known as "disqualified individuals." Compensation is excessive if it exceeds three times the average of the individual's taxable compensation over the preceding five years. Disqualified individuals are employees or independent contractors that are also shareholders, officers or highly compensation individuals. A related provision of the code imposes a 20% excise tax on all excess parachute payments. 280G contains special rules for the acceleration of the vesting equity. For time-based equity, the portion of the payment that will be deemed contingent on the change in control (and thus potentially being a parachute payment) will be the lesser of (1) the amount of the accelerated payment or (2) the amount of the payment that exceeds the present value of the amount that would have been paid in the future, plus an amount specified in the rule reflecting the value of the lapse of the service obligation. With respect to equity subject to performance conditions, however, the general rule is that the full amount of the payment that vests due to a change in control is considered a payment contingent on the change in control. There is however, a private letter ruling from 2001 (PLR 200110013) that provides that the rule for time based equity can be applied to the portion of a performance award for which it can be demonstrated with mathematical certainty will become payable at the end of the performance period, conditioned only on continued service. For example, assume a three-year performance period with one year goals that are averaged together. If the change in control happens at the end of year 2, there is a minimum amount that will become payable, even if 0% of the award is able to vest in the third year. That minimum amount can be treated pursuant to the special rule for time-based equity. The 280G regulations also indicate that a portion of the contingent payments could be supported as reasonable compensation for services rendered prior to the change in control. There is little to no guidance on how exactly one would determine the amount equal to reasonable compensation so this is a risky approach. |