As the Tax Code allows a corporate deduction only for reasonable compensation to employees, Section 162(m) needed an exception for performance based compensation. According to the September 5, 2006 Joint Committee on Taxation background briefing if the CEO or other top executive gets stock option grants with exercise price equal to market price, then the options granted would be presumed to be reasonable because they would be performance based.
The Tax Code allows corporations to deduct employee compensation only if it's deemed "reasonable." Section 162(m) needed an exception for performance-based compensation. The September 5, 2006 Joint Committee on Taxation background briefing states that if a CEO or top executive receives stock options with an exercise price equal to the market value, these options are considered reasonable because they're performance-based.