Though the practice is popular throughout public companies worldwide, the footing of executive tax bills has lost investor favor, with RiskMetrics yesterday giving the practice its stamp of disapproval. “Gross-ups,” corporate reimbursement for taxes executives pay on certain perks or “golden parachute” plans, are widespread in today’s compensation climate, but the proxy advisory firm is telling investors to withhold their support for directors that approve such packages.
Gross-ups were written as a response to a 1984 law requiring a 20 percent tax payment on perks that exceeded a limit—paid by the executive receiving the payment. RiskMetrics found that two thirds of the S&P 500 offered gross-ups, in spite of a 2007 poll that showed three quarters of investors labeling them “problematic.”
Companies that offer gross-ups invariably pay larger severance packages; those two thirds of the S&P 500 paid on average 38 percent more than average. “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 the RiskMetrics Center for Corporate Governance.
RiskMetrics will release its 2009 shareholder voting guidelines later in the week that will advise investors to withhold votes when new or renewed gross-up plans are implemented.
Earlier in the year the American Federation of State, County, and Municipal Employees attempted a turnover of gross-ups at six of its companies, but was unsuccessful at all. The pension fund will attempt to resubmit proposals in the coming proxy season.