Designing a US public company equity compensation plan
Designing a US public company equity compensation plan

The following Share Incentives guidance note provides comprehensive and up to date legal information covering:

  • Designing a US public company equity compensation plan
  • Legal and stock exchange issues
  • Plan drafting

Publicly held companies often grant equity awards to executives and other key employees (and, in many cases, even to fairly low-level employees) to align their interests with those of the shareholders. This Practice Note discusses key legal and practical issues with these plans.

For equity incentive plans in connection to privately held companies, see Practice Note: Drafting a US private company equity compensation plan.

Legal and stock exchange issues

Tax issues

Shareholder approval of the plan is required for the company to grant tax-favoured incentive stock options pursuant to section 422 of the Internal Revenue Code (IRC) (the Code). The company must obtain such shareholder approval within 12 months before or 12 months after it adopts the plan.

Prior to tax reform legislation enacted in 2017, it was also common for public companies to obtain shareholder approval of incentive plans designed to grant awards that constituted performance-based compensation under IRC, s 162(m). IRC, s 162(m), as amended, generally limits the compensation deduction to $US 1m for the company’s ‘covered employees’ (now including the principal executive officer, the chief financial officer, and the other three most highly compensated named executive officers for a tax year, and anyone having covered employee status in a previous tax year beginning after 31 December 2016). Shareholder approval of performance goals was one of the conditions for an