colour us ignorant but we had no idea that this went on. We feel dumb. But sounds like it may not go on much longer!
WSJ: In the latest move to curb executive-pay excesses, an influential proxy-advisory firm is cracking down on the common but controversial practice of footing big tax bills for executives.
RiskMetrics Group says it will advise investors to withhold votes from corporate directors who approve “gross-ups” to cover taxes owed by executives for perks or “golden parachutes,” rich exit packages when a company is acquired. A 1984 law imposed a special 20% tax when such packages exceed a certain limit. But many companies agree to pay the taxes — often at huge cost.
For example, Capital One Financial Corp. said it paid $107.6 million in taxes on behalf of John Kanas, the former chief executive of North Fork Bancorp, which Capital One acquired in 2006.
Um, that’s INSANE.
RiskMetrics, which advises institutional shareholders on proxy fights, director elections and shareholder resolutions, began reviewing gross-up provisions after a 2007 poll found that three-fourths of investors considered them “problematic.”
“Problematic?” How 2007. Wonder what investors would refer to them as today?
…Its review found that about two-thirds of the companies in the Standard & Poor’s 500-stock index offer gross-ups. These firms also offer especially lavish golden parachutes, valued at an average of $61 million, excluding the gross-up. That’s 38% more than the average parachute at companies that don’t pay the taxes, RiskMetrics says.
We knew about the golden parachutes but not about the tax coverage. Wow.
“The companies that are willing to cover [those taxes] seem to feel there are no holds barred with regard to their payouts,” says Carol Bowie, director of RiskMetrics’ centre for Corporate Governance. Ms. Bowie says the RiskMetrics recommendations, included in its 2009 share-voting guidelines to be released this week, will apply to members of board compensation committees who approve new, or renewed, gross-ups, but not existing provisions.
RiskMetrics’ policy change comes amid growing furor over executive pay in the wake of the Wall Street crisis. Outrage over multimillion-dollar packages paid to executives who left failing financial firms spurred Congress to impose bans on golden parachutes for companies that tap government bailout funds.
Check out the WSJ’s chart of the companies which, shall we say, play a little too nice with the execs. Beyond Nuts.
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