Code Section 162(m) sets out the limits of the corporate tax deductions for compensation paid to specific officers of publicaly held companies. the rule applies to the CEO and the three most highly compensated officers, excluding the CFO. Officer status for Section 162(m) is determined on the last day of each taxable year. For most companies, tax deductions are limited to the first $1,000,000 of compensation paid during the year. Generally for the majority of companies, tax deductions are limited to the first $10,000,000 of compensation paid during the year. For some companies this limmit is set to $500,000. Performance based pay is defined by this section off the code and is not subject to the $1,000,000 limit. As long as a few requirements are met, stock options and SARs will qualify for the 162(m) treats. If there are performance conditions against the shares this does not mean that these shares automatically qualify these awards under Section 162(m). Restricted stock shares and units may qualify for Section 162(m) treatment if the shares are units become vested or earned only upon meeting pre-established, objective performance goals under a shareholder approved plan. The requirements of 162(m) must be considered to ensure payments with a value above $1,000,000 remain tax-deductible by the company. 

For compensation to qualify as "performance based" under Section 162(m), the compensation committe of the board of directors must consist of two or more outside directors. It is these compensation committe members that are responsible for establishing the performance goals defined in the plan. Compensation committee members may use internal and external resources to determine apropriate goals. If the compensation qualifies for Section 162(m) the compensation must rely solely on the attainment of one or more preestablished performance goals. These goals must be defined by an objective formula and must be substantially unccertain to be met as of the date of the date the related service period begins. The formula and goals must be established in writing before the date on which $25% of the lated period has elapsed or  within 90 days from the beginning of the service period and that is related to the performance goal measurement time period. 

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