The Advisors' Blog

– Broc Romanek

If you want to really test your say-on-pay fate, include a 280G gross-up in your executive agreements. Section 280G of the Internal Revenue Code can impose an excise tax on executives who get a pay-out in connection with a change-in-control event – and the gross-up provision says that the company will pay that tax on the executives’ behalf. It’s often worth millions of dollars.

For obvious reasons, shareholders & proxy advisors strongly dislike these provisions. They’ve become rare since the implementation of say-on-pay since they usually result in an automatic “against” vote. But it looks like some companies have found a workaround – just wait until merger time to reintroduce the gross-up. Here’s an excerpt from this Equilar analysis:

Considering how much gross-ups have declined in prevalence, it’s surprising to see 25% of companies still paying them at merger time, including 15% of the companies specifically choosing to add them back in during the merger negotiation. The most common explanation from companies for adding gross-ups was that a significant stock price increased the value of equity acceleration to the point that it pushed the total change in control payment over the safe harbor amount.

The question then is whether companies face any consequences for going back on their implied 280G pledges. Data shows that there is a little pushback, but mostly zero consequences. For mergers that require a special shareholder vote, investors get one last opportunity to sound off on pay in the form of a Say on Golden Parachute vote. This vote is non-binding, has no consequences for failure, and companies typically cease to exist shortly after the vote. In other words, the vote is toothless. That said, golden parachute voting results for this limited study show that adding in gross-ups has a strong negative effect on approval rates – average approval ranges from 54-65% for companies with gross-ups compared to 88% for companies with no gross-up.