I think I've mentioned this before that Gretchen Morgenson is one of the consistently rare New York Times reporters who breaks ground and is a damn good reporter. She believes in capitalism but is appalled by the obscene greed of the CEO class. Virtually every column she writes each week in the Sunday Times Biz Section digs into the robbery underway in the executive suites.
And, today, she has a new one:
Buried in these figures is one of the most contentious items in all of payland: the “tax gross-up.” That is the amount shareholders must pay to cover excise taxes arising when a top manager pulls the ripcord on his or her golden parachute.
“This number has never been disclosed to shareholders in the past, but new proxy requirements will force it into public view,” said Michael Kesner, principal at Deloitte Consulting in Chicago. “Boards are now just getting a sense of how big that number is. People are surprised.”
Excise taxes came into being in 1984 with federal legislation intended to rein in excessive parachute pay. A tax of 20 percent kicks in when an executive’s exit package exceeds 2.99 times his or her average annual pay over the last five years. Once the 2.99 multiple has been exceeded, the executive’s entire pay is taxed, not just the excess amount.
The gross-up provisions that came after the law are yet another example of the unintended consequences of trying to legislate executive pay. With their armies of accountants and lawyers, chief executives almost always find ways around any law created to tamp down their pay. Close the door, they’ll open a window.
This creativity on behalf of corporate executives winds up costing shareholders a lot of green. That’s because combining federal, state and excise taxes usually puts an executive in a 60 percent tax bracket, Mr. Kesner explained. A company would therefore have to spend $100,000 to cover $40,000 in taxes generated by a parachute payment.
“Gross-ups are very expensive to shareholders,” Mr. Kesner said. “The board has an obligation to look at them and see whether they are reasonable.”
So, there are going to be some very surprised shareholders--the hit on companies who have blindly given huge pay packages to CEOs is going to be a very unpleasant surprise.