Andrew Lund (Pace) asks: does the stimulus bill's restriction of performance-based executive compensation (to one-third of total compensation) presage the ultimate repeal of the exemption in § 162(m) for performance-based compensation from the prohibition on public company deductions for executive compensation in excess of $1 million for its top five officers:

Now that Congress has rejected performance-based pay as an effective tool for aligning executives’ interests with the federal-government-as-creditor, can the § 162(m) performance-based pay exception be far behind?

Maybe the federal government’s concerns as a creditor differ from the shareholder-intensive focus of § 162(m). If performance-based pay, as usually practiced, favors shareholders vis-à-vis creditors (and if we can justify preferring shareholders to creditors outside of the bailout context), the two positions are not necessarily irreconcilable. But I’m more than a little skeptical that Sen. Dodd was thinking about this shareholder/creditor distinction when he forced the provision through in the face of opposition from the Obama administration. Rather, it seems like Congress (and Barney Frank, in particular) doesn’t trust performance-based compensation anymore as a corporate governance tool. Accordingly, I suspect there’s a better than 50/50 chance that the § 162(m) loophole will be gone in the near future for all public companies. …

What would it mean to take away the deduction? It isn’t clear how much § 162(m) has really driven decisions about total compensation and, to the extent it has, whether it’s been a net positive. (See Gregg Polsky’s nice paper on the subject.)  It certainly has shifted the kind of pay towards performance bonuses and stock options. And although the feds may not be into performance-based pay anymore, institutional shareholders still are. So the end of the § 162(m) exception would likely not signal a shift away from options to salary or lower total comp. Instead, it would only further level the playing field between plain vanilla options and both restricted stock and indexed options, neither of which currently count as “performance-based” for § 162(m) purposes unless vesting is conditioned on a performance hurdle.