By: Mark Ftizgerald
Facing a shareholder proposal on so-called “excise tax gross-ups” — in which a company pays part of the tax on a top executive’s golden parachute — Gannett Co. board of directors Thursday eliminated the perk for future executives.
A proposal to eliminate gross-ups in change-of-control situations won an unusally large 48% of shares at Gannett’s 2009 annual meeting. The the Amalgamated Bank LongView Large Cap 500 Index Fund came back with the proposal again for the annual meeting scheduled next month.
But Gannett said in a regulatory filing Thursday evening that it had discussed no longer including gross-ups in future employment contracts with the fund — and Amalgamated “has advised the company that it agrees that the policy substantially implements the shareholder proposal made by the fund, and accordingly the fund has indicated that its representatives no longer intend to attend the 2010 annual meeting to make the proposal.”
Executives who have employment contracts prior to April 15, 2010 will be grandfathered in and retain the perk, Gannett said.
That represents a big turnaround for the board, which in proxy materials for the annual meeting recommended unanimously against changing its gross-up policy, which it said was a matter of fairness. One argument made by the proxy:
“For example, an employee who voluntarily chooses to defer some of his or her compensation in the ordinary course and not in contemplation of a change in control may be forced to pay an excise tax, while another employee at the same pay grade who did not defer any compensation might not have to pay an excise tax. Similarly, an employee who exercised stock options before a change in control may not be subject to an excise tax, while another employee with the same stock options who did not exercise them might have to pay an excise tax.”
But in its material, Amalgamated argued the gross-up in the case of golden parachutes breaks the pay/performance link in compensation because they are based on an individual’s tax bill, which can vary widely.
“The amounts involved in tax gross-ups can be sizeable, especially gross-ups relating to excess golden parachute payment excise taxes, which apply in a change-of-control context,” Amalgamated’s supporting statement says. “Michael Kesner of Deloitte Consulting has estimated that gross-up payments on executives’ excess golden parachute excise taxes can account for 8% of a merger’s total cost.”
Amalgamated noted that in a filing last year, Gannett “estimated that its top five executives would be entitled to a total of $16 million in gross-up payments following a change of control in which the executive’s employment is terminated for reasons other than ’cause’ or is terminated by the employee for ‘good reason.'”
Gannett will continue to offer gross-ups in the case of executives who must move to take a promotion or new assignement. Amalgamated had previously indicated it believes those gross-ups are fair and should be retained.