Executive pay transparency has brought Section 280G calculations out of the shadows and into public view. Within the “Potential Payments Upon Termination or Change in Control” tables of proxy statements, investors are paying closer attention to how companies disclose parachute payment exposure.
Where 280G Appears in the Proxy
Public companies must disclose estimated values of benefits payable to named executive officers under various termination scenarios. One of these scenarios is termination in connection with a change in control. This is where 280G becomes relevant. If the change in control triggers parachute payments that exceed IRS limits, the resulting excise tax exposure and deduction loss must be explained clearly.
How 280G Is Incorporated
To prepare proxy disclosures, companies typically model a hypothetical change in control occurring on the last day of the fiscal year. This simulation estimates:
- Cash severance
- Accelerated equity (both time- and performance-based)
- Bonuses or perquisites tied to the transaction
- Cutback or gross-up implications
This exercise ensures transparency for shareholders but may not reflect the actual timing or outcomes of a real transaction.
Key Disclosure Assumptions
The common assumption that a change in control occurs on the final day of the fiscal year simplifies reporting but introduces limitations. Because base amounts are calculated using prior years’ compensation, they may not reflect current pay structures or recent performance outcomes. As a result, the modeled 280G exposure in the proxy may differ from what would occur in practice.
Why It Matters
As investor scrutiny increases, boards should ensure that disclosures align with the company’s true 280G exposure. Outdated base amounts or simplified equity assumptions can lead to material gaps between proxy estimates and real-world transaction outcomes. Including a narrative bridge or additional explanation can enhance transparency and investor confidence.
Enhancing Transparency Through Better Disclosure Practices
As scrutiny of executive pay continues to rise, 280G modeling has become an essential part of transparent and responsible proxy disclosure. Leading companies are going beyond minimum compliance, using their termination tables to demonstrate governance rigor, alignment with shareholder interests, and a clear understanding of potential change-in-control outcomes.
Organizations can strengthen investor confidence by ensuring 280G analyses are current, assumptions are explained, and both equity and cash components are modeled consistently across all scenarios. This proactive approach not only improves disclosure quality but also reduces the risk of surprises during real-world transactions.
To learn more about emerging best practices in 280G disclosure and valuation modeling, contact the experts here.
