Inflating Golden Parachutes

Inflating Golden Parachutes

Maura McEnaney

Pulling the ripcord on golden parachutes can be an expensive decision for some executives whose weighty contracts trigger hefty excise taxes. But a recent survey by New York- based human-resources consultancy William M. Mercer Inc. finds that, as competition for top talent intensifies, more companies are offering to cover this tax liability should an executive be. ousted in a corporate takeover.

A golden parachute’s postmerger severance package is often huge. It’s no surprise, then, that the Internal Revenue Service wants a piece of the windfall. During the 1980s mergers-and-acquisitions craze, the IRS imposed a 20 percent excise tax on what it considers “excess parachute payments-or more than three times an executive’s average annual compensation five years prior to the takeover.

As a result, many companies now offer “gross-ups,” added payments that cover excise taxes levied on an executive whose golden parachute opens in the wake of a merger or change in control. Although gross-ups are not tax deductible at the corporate level, many companies believe they are needed to attract-and retain-valuable executives.

By including gross-ups in golden parachutes, companies give executives the financial com fort that allows them to better concentrate on the business aspects of a merger or acquisition, according to Mercer principal Howard Golden. With gross-ups, executives know they’ve negotiated a severance package that will make them “whole,” he says.

Gross-ups were added to executive compensation packages two years ago at KeyCorp, a $76 billion bank holding company based in Cleveland. According to spokesman William Murschel, the benefit is extended to senior officers and other high-ranking executives. “Tax gross-up policies are becoming prevalent to protect the accumulated benefits of senior executives who have acquired substantial pension and vested stock options and may nearing retirement age,” Murschel explains.

To be sure, Mercer’s study of 350 large publicly traded companies found that 64 percent of those with golden parachutes now offer gross-up payments, up from 46 percent in 1994. Among the group: Ingersoll-Rand, Hershey Foods, Avery-Dennison, and General Signal. And Golden expects this benefit trend to continue. “Without the benefit,” he asserts, “top-level recruitment and retention strategies dized.”

COPYRIGHT 1998 CFO Publishing Corp.

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