Grants of restricted stock are not inherently performance-based. This is due to the fact that the executive may receive compensation even if the stock price decreases or stays the same. A grant of restricted stock is treated like cash and does not satisfy the definition of performance-based compensation, unless the grant of the restricted stock is solely based upon the attainment of a performance goal or standard (set by the compensation committee and/or shareholders). While not overly common, restricted stock is one way in which many executives are "quietly" compensated by effectively tendering stock into cash.

Performance-based compensation is a growing trend among compensation procedures. It is currently being acted upon as "pay for play" theories where compensation accounts for the attainment of one or more performance goals within the company. These performance goals are established by a compensation committee consisting solely of two or more outside directors (not a current or former employee or officer of the corporation,and does not recieve compensation for personal services other than for directorship). The material terms under which the compensation is to be paid, including the performance goals, are then disclosed to and approved by the shareholders in a separate vote prior to the payment. The committee verifies that the performance goals and any other material terms have been successfully met and completed in order for the executive to receive the full compensation.

Performance is based on standards for the individual executive, for a particular branch, or for the company as a whole. Performance standards could include increases in stock price, market share, quarter or annual sales, or earnings per share. Please note that executives are allowed some discretion in their performance-related compensations; as well, their performance may be reevaltuated based on preestablished objective goals and performance formulas.

Deferred compensation is exactly what it sounds like: compensation that is deferred until a later date. Why would someone defer their compensation, especially given the time value of money? Well, it turns out that the government offered many tax benefits for those who did defer their compensation. Consequently, executives sought to defer large amounts of compensation as a way to avoid paying taxes. Recently laws have reversed this trend, however, by placing a $1 million cap on all deductions.

Under the new laws, a corporation may deduct compensation expenses as an ordinary and necessary business expense for its employees. However, the otherwise acceptable deduction for compensation paid or accumulated to a covered employee of a public corporation is limited to no more than $1 million a year. A person is considered a covered employee if they are the CEO of a corporation (or the individual acting in such capacity) at the close of the taxable year; as well, the four highest compensated employees are also taken into account for the limitation's rules.  

The deduction limitation is applied even in the case of an emergency resulting from transfer of property in connection with the performance of services. The deduction limitation applies to all compensation for services, including cash and the cash value of all remuneration (including benefits) paid in medium other than cash. There are a few factors that are not included in the deduction limitation. Such factors not included are remuneration based on commission; remuneration payable solely on account of the attainment of one or more performance goals if certain outside director and shareholder requirements are met (performance-based compensation); payments to a tax-qualified retirement plan (including salary deduction contributions); and amounts that are excludable from the executive's gross income (such as health benefits and miscellaneous fringe benefits). 

Executives are covered by a wide range of compensation arrangements, which will be discussed in our new series. These arrangements may include agreements between several employees or it may consist solely on individual agreements between the company and one executive. Typical arrangements include nonqualified deferred compensation and stock option programs due to their tax benefits. There is, however, a limit on a company's deduction for compensation of certain employees in excess of $1 million - a limitation that applies to the chief executive officer and the four other most highly compensated employees. However, performance-based compensation is not subject to the deduction limitation. Studies have indicated that the deduction limitation may have led to some substitution away from salary compensation toward performance-based compensation, but that growth in overall executive compensation has not been reduced.

Our series will primarily explore the various types of stock-based compensation, which includes stocks, stock options (right to purchase shares by a certain date), restricted stock (stock with restrictions tied to them, such that can't be sold for a certain amount of time, etc.), stock appreciation rights (the right to the gains of the stock as if you owned it), and phantom stock (artificial shares that the company values at the going market rate).