As we know, compensation in excess of $1.0M for certain individuals is generally not deductible by a public corporation. One exception to this rule is performance based compensation. In order to maintain the exception, the company has to have preset performance goals that are objectively determinable. However, it is very common for plans to allow a compensation committee to adjust the preset performance goals when the corporation experiences an extraordinary event (e.g., the unexpected sale of a division when the productivity of that division was part of the compensation formula). I don't see anything in the Regulations that would specifically permit adjustments to performance goals after they've been set. Does anyone know if there is any specific authority that allows this kind of adjustment? Thanks.

There is no specific authority I know of but there's fine line between making the adjustment you suggest and actually changing the goals. You can't change the performance goal(s), but as long as you avoid positive discretion, you can take into consideration extraordinary events in determining the available bonus pool. The challenge is to have as little as possible discretionary authority in these matters by using GAAP and other objective standards for making the determination, and be consistent. The IRS would likely only pinch you if you did something obviously sujective like leaving it up to the committe to make the adjustment--the plan should state that the adjustment will be made, not may be made. And if that means a lower pool for execs, then so be it, they can't have it both ways in this matter