In 1993 Congress added Section 162(m) to the tax code. A public company could no longer deduct more than $1 million a year in pay to a top executive. Pay that counted as performance-based was exempt. Stock options typically qualified.
An article in the Pittsburgh Tax Review states that the section “contributed to the dramatic increase in the use of stock options and other forms of performance-based pay.” The Tax Cuts and Jobs Act of 2017 repealed the exception.