The Advisors' Blog

– Mark Poerio, Paul Hastings

A recent Marketwatch article concludes with one quotation condemning golden parachute tax gross-ups for executives as a “skeleton in the closet” (Paul Hodgson of GovernanceMetrics International), and another one saying “It’s time for these to go” (Charles Elson, a University of Delaware professor specializing in corporate governance).

What really should go are tax gross-ups that are poorly considered or poorly structured. Employers certainly need to understand the significant cost for these commitments. There are instances, however, when a tax gross-up may represent a fair balancing — or arms’ length negotiation — of employer interests and executive incentives. For example, the shift to performance-based stock awards and longer-term incentives dramatically changes the calculus behind the golden parachute rules, by increasing the parachute payments that are deemed to occur from an acceleration of vesting.

While good governance often warrants longer-term incentives, there are occasions when the consequent shift in compensation structures should include a limited tax gross-up (such as for some protection above threshold materiality triggers). The protection is often key to the hiring of an executive to turn-around a failing or stalled company, especially if the lion’s share of the compensation package comes in the form of performance-based incentives that become vested on a change in control. This is not meant to defend tax gross-ups generally, but instead to suggest that exceptions be recognized for soundly considered actions and constructs. Unfortunately, say-on-pay’s empowering of proxy advisors is at times resulting in excessive rigidity. Check out my “Executive Loyalty” Blog…