Will 2010 See the End of the Grossest Executive Perk of All?

Win the lottery or make a killing on an investment? The IRS will be waiting for its share. But for years, windfalls haven't quite worked that way for top executives at many of America's largest companies. Not that the IRS hasn't been getting what it's owed -- but it hasn't been the executives who've been paying.That's because of something known as the tax gross-up, which bestows additional money on the executive to cover whatever the tax bill might be on any number of things -- from the sale of stock to various perks. Just last month, Dell revealed in this SEC filing that Ross Perot Jr., who is routinely on Forbes' list of richest Americans, would be getting a $1.1 million gross-up to cover the taxes that he would have had to pay on his severance package, following the sale of Perot Systems to Dell (DELL) for close to $4 billion.

%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% Indeed, it's pretty hard to imagine something much grosser than a tax gross-up. It smacks of the type of entitlement that most reasonable, red-blooded capitalists would normally rage against. Yet it has been a routine part of many executives' employment agreements and M&A deals for quite some time. The argument in favor of the gross-up is that executives should be "made whole" for their taxes so that they don't wind up getting less money than they should. But using that theory, shouldn't there be a gross-up when you sell 100 shares of stock or your house for a profit (back in the days when that was still a possibility)? Should someone who sells their company or a large chunk of stock hire the best tax advisors they can to minimize their tax burden? Absolutely. But expecting somebody else -- in most cases, it's the company's shareholders -- to pick up the tax bill is simply reprehensible.

Thankfully, a small number of companies (and executives) appear to be coming to their senses when it comes to the gross-up. While it's way too early to declare it DOA, in recent months, there has been a growing wave of executives -- and corporate boards -- who are just saying no to the gross-up. This is happening at both small companies and large ones too. A few examples:

  • In August, retailer Kohl's Corp. (KSS) revised its employment contracts with its top executives to eliminate the gross-up following a change in control.
  • At the beginning of this year, drugstore chain Walgreen (WAG) changed its policy on tax gross-ups for its Profit Sharing Plan for top executives. As the company noted in this filing with the SEC, the payments weren't particularly hefty -- just over $4,000 last year for former CEO Jeff Rein. But apparently, even that small payment didn't send the right message.
  • Restaurant chain Jack in the Box (JACK) recently eliminated tax gross-ups on executive perks; it also said that any new change-in-control agreement would not include a tax gross-up provision.
  • Medical device maker AngioDynamics (ANGO) -- hardly a household name -- eliminated tax gross-ups for its top executives when it renewed their standard change-in-control agreements, which had expired at the end of 2009.

There are other examples of companies trying to eliminate this particularly offensive perk. One can only hope that 2010 sees an even greater number of companies coming to their senses.

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