The levels of executive compensation allocated to managers of U.S. public companies has been criticized in the media and on Capital Hill as scandalous. When a company stubs its toe, the fact that the CEO is taking home millions while the shareholders take a hit is viewed as obscene—an epithet applied even though the compensation is the result of binding contractual provisions that antedate the company’s hiccups and are not conditional on subsequent performance. In fact, before the enactment of I.R.C. Section 409A, the outrage was intensified by the fact that “in the money” options—calls on a security at a price below the current trading price—had frequently been awarded.
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