Investor relations professionals frequently have to deal with an embarrassment of riches. Literally. When executives reap gigantic windfalls triggered by mergers or acquisitions, or bosses dump shares in advance of a negative earnings report, hostile calls from the press and shareholders light up the switchboard.
The latest challenge: dealing with questions about ‘gross-ups’, cute little techniques whereby shareholders pay for the taxes incurred by CEOs and other top executives when the latter realize windfalls. Last fall, the Wall Street Journal did a lengthy article on the trend. The grossest gross-up came in March when Capital One bought North Fork Bancorp. John Kanas, CEO of North Fork, received a package worth more than $185 mn, including up to $111 mn in gross-ups alone.
Executives have adopted a range of tactics to explain such oddities. They are, in ascending order of effectiveness:
The 1950s nuclear bomb drill method. In other words, duck and cover. ‘My sole comment would be I consider it to be a fair and appropriate package,’ said Raymond Nielsen, chairman of North Fork’s compensation committee. Upside: who can be against fairness and appropriateness? Downside: reeks of stonewalling.
Blame the market. ‘Hey, everybody’s doing it, and we’ve got to stay competitive!’ When the Wall Street Journal commissioned compensation consultant Equilar to do a study of the 100 largest companies, it found that more than half were offering gross-ups to top executives. Upside: shifts the focus of the story from your company to a broader trend. Downside: if the words ‘lower quintile’ and your ticker symbol ever appear in the same sentence, benchmarking can become a four-letter word.
Blame the directors. A Coca-Cola Bottling Company spokesman, talking about a huge gross-up for its boss, told the Wall Street Journal that the allocation ‘was unanimously passed by the compensation committee, overwhelmingly approved by shareholders and all proper corporate governance protocols were followed’. Upside: the ignominy suffered by directors is offset by the fat fees they receive. Downside: could make for uncomfortable moments at the next golf outing.
Gently refer reporters to the relevant sections of proxy statements and other SEC filings. The New York Times reported, for example, that ‘North Fork’s compensation committee, as is common among large companies, has relied upon an outside consultant to provide advice on its pay practices, according to its regulatory filings’. Oh, and the same disclosures hinted that the consultant – in this case Mercer – had done other services for the company, like retirement planning. Implication: the consultants recommended a sweetheart deal because they were angling for other business. Upside: plays into a general society-wide contempt for non-value-adding consultants. Downside: these guys do benchmarking for IR compensation and budgets too.
