The Internal Revenue Service (IRS) recently issued a notice thatexcludes the CFO from the group of executive officers who areconsidered covered employees under Section 162(m) of the InternalRevenue Code. Under 162(m), a public company may not deduct morethan $1 million of executive pay for each covered employee eachyear, unless the compensation is performance-based. Besidesspecifically eliminating the CFO, the IRS also reduced, to threefrom four, the number of individuals in addition to the company'sCEO who are considered covered employees.

The reason? The disclosure rules upon which the IRS code wasbased were changed. When Congress first adopted the $1 million capon executive pay deductions in the 1990s, it based its list on theSecurities and Exchange Commission (SEC) rule specifying whichexecutive salaries had to be disclosed by a public company in itsproxy. At that time, a company had to list the compensation of itsCEO and the next four most highly compensated officers. Last year,however, the SEC changed its disclosure standard to requirecompanies to disclose the pay of not only the CEO, but also the CFOand the next three most highly compensated executives. But whilethe SEC rule changed, the IRS code cannot change without Congresspassing new legislation.

This is good news for companies because instead of having fiveexecutives whose compensation is subject to a deduction cap, thereare only four, remarks Mark Borges, a principal at Mercer HumanResource Consulting. And at least for the immediate future, CFOcompensation is not subject to the same limitations as the otherfour executives. For CFOs whose companies said they couldn't paymore than $1 million in base or non-performance linked pay becauseof the tax code, the news is good. Says Borges: “Some people havesaid [that] CFOs caught a break.”

Shareholder advocates are not particularly impressed, claimingthe law has never really constrained executive salaries because ofloopholes. “We filed this under 'silly changes to a stupid rule',”says Patrick McGurn, special counsel to Institutional ShareholdersServices. “As it is, the rule considers plain vanilla stock optionsto be performance-based, which means a large chunk of compensationisn't covered anyway.” But McGurn notes that one of the mostinteresting aspects of the revision was the elimination of the CFOas a covered employee since in many, if not most, cases the CFO isin fact one of the four most highly compensated executives. Now, hepredicts, Congress will probably feel forced to address therule.