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In order to comply with the requirements to qualify compensation as “performance-based compensation” for purposes of Internal Revenue Code Section 162(m), the following provisions must exist in a plan:

  • Limits on the number of shares or dollar amount  that can be awarded to an individual during a specified time period.
  • The performance measures that can be used to establish performance goals for the vesting or award of incentive awards.

 The limits are typically written on the basis of the type of award, either by individual awards or class of awards. The time period for these limits to apply is typically a calendar year, however, some limits are written to cover a multi-year period or the life of the plan.

Sample 162(m) annual award limits and performance measures provisions can be found in the 2004 Long-Term Incentive Plan submitted to shareholders by The Gillette Company as part of its 2004 annual proxy: