This excerpt taken from the ATVI DEF 14A filed Jul 30, 2007.
Impact of Tax and Accounting Consideration
The Company considers tax and accounting implications in determining the major elements of its compensation programs and the details of significant individual compensation.
In structuring compensation programs and in setting individual compensation levels and awarding bonuses each year, the Compensation Committee considers the potential impact of Section 162(m) of the Internal Revenue Code. This section generally disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year paid to its "covered employees" (generally, the chief executive officer or any of its three other highest paid officers other than the chief financial officer) unless (1) the compensation is payable solely on account of the attainment of pre-established objective performance goals, (2) the performance goals are determined by a committee of two or more outside directors, (3) the material terms under which compensation is to be paid are disclosed to and approved by the Stockholders, and (4) the committee certifies that the performance goals were met. The tax deductibility of deferred compensation paid to other executives is not subject to these limitations.
As discussed above, the Company's compensation program for named executive officers incorporates an annual base salary, a performance-based annual bonus and long-term incentive and equity grants as the primary components. None of the Company's covered employees' salaries exceeds $1.0 million, and the Company may therefore deduct the full amount of each executive's salary in any taxable year. With respect to annual performance-based bonuses and long-term incentive and equity grants, the Compensation Committee has determined, in light of the competitive environment in which the Company operates, that these annual bonuses and options or other equity-based compensation are necessary to attract and retain the best executives, whether or not the compensation results in expenses that are fully deductible under Section 162(m).
If the 2007 Plan is approved by the Stockholders, the Compensation Committee may structure performance-based annual bonuses to employees who are "covered employees" for purposes of Section 162(m) in a manner that would allow the payments thereunder to satisfy the requirements of Section 162(m) for deductibility. In addition, to the extent that any award granted under the 2007 Plan constitutes a deferral of compensation within the meaning of Section 409A of the Code, the Compensation Committee intends to cause the award to comply with the requirements of Section 409A and to avoid the imposition of penalty taxes and interest upon the participant receiving the award.
The Compensation Committee also takes accounting considerations, including the impact of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Shared-Based Payment ("FAS 123(R)"), into account in structuring compensation programs and determining the form and amount of compensation awarded.