Posted by Carl Icahn December 9, 2008 : 12:42 PM
Let’s say you're the CEO of a big company and your friends on the board have awarded you a big "golden parachute" severance package so you’ll be set for life if the company gets taken over. Nice deal for you.
Then, your company then gets a takeover offer that your board accepts. Bingo! You win the grand prize – about two-thirds of the Fortune 500 companies paid out an average of $61 million in golden parachutes, according to a recent RiskMetrics study.
Then you see the tax bill. It's a whopper. Thankfully, your company doesn’t want you to suffer, so they pay your taxes for you, using shareholder money.
Sound incredible? Not in today’s corporate America.
According to RiskMetrics, the parent of Institutional Shareholder Services, about two-thirds of the Fortune 500 companies will pay the taxes on your golden parachute. They even have a name for these payouts: gross ups. So you can take home that $61 million scot-free.
Just when you thought the outrageous greed at the top of the corporate ladder couldn’t get any worse, we find more eye-popping examples.
For example, Capital One Financial Corp. – the credit card company that’s getting $3.6 billion in federal bailout funds – paid $107.6 million in taxes for John Kanas, the former CEO of North Fork Bancorp, which Capital One bought in 2007, according to the Wall Street Journal.
But instead of wringing our hands, it is up to shareholders to challenge these outrageous practices. To quote Shakespeare in Julius Caesar, "The fault, dear Brutus, is not in our stars, but in ourselves." We as shareholders let the boards get away with their mediocre jobs and now we are all feeling the pain – in lost jobs, lost money, lost economic power.
Can there be any better reason for shareholders to rise up and challenge the status quo? If a company is going to pay taxes for its top executives, why shouldn’t they pay taxes for shareholders? Are owners of the company any less deserving than the managers, who are after all simply employees in the end? These senior executives are not sovereign rulers, although many act as though they are.
Gross ups ought to be eliminated, except in certain rare cases for executives who have consistently outperformed and shareholders have also made substantial and sustainable gains. For the most part, public companies should not be in the business of paying personal income taxes for executives using shareholder money.
One reason we have excessively compensated executives is that law firms, consultants and others paid by companies give them legal cover to do this. A recent Wachtell Lipton memo to clients is a prime example.
For instance, suppose a manager fails to achieve performance goals that qualify him for a bonus? Instead of using the incentive to make him work harder to achieve targets, Wachtell Lipton says companies can "use its business judgment to override the applicable performance goal and make discretionary bonus payments," according to the Dec. 3 memo.
Simply put, the law firm says companies can ignore the purpose of an incentive – a bonus based on performance – and simply pay them anyway. I would like to know how it serves shareholder interests when employees are paid bonuses whether they perform well or not.
Similarly, suppose stock options for executive have a "strike price," or redemption value that is far above a company’s share price? With the stock market swoon, many executives no doubt find themselves in this situation.
Previously, some companies simply lowered the option grant price, until these "backdating" practices were uncovered and prosecuted. But Wachtell, in the same memo, provides a different solution: companies can simply issue more options at a lower price.
"Compensation committees may determine that (existing) options have lost meaningful incentive and retentive value," says Wachtell Lipton in the memo. "Under these circumstances, a compensation committee may wish to consider making a one-time special option grant or accelerating the 2009 option grant, in order to take advantage of depressed share prices and restore the incentive and retentive impact of company options."
In other words, reward your employees whether the company achieves higher stockholder value or not, since they may resign.
In many cases, concerns that an executive may leave is not a real reason that companies pay 'retention bonuses.' The real reason is often just to award their friends and buddies in the company, regardless of their performance.
I say let them leave rather than pay them for failure. It's a buyers market for executive talent these days. Why should corporate America be rewarding executive failure? Why should we pay retainer bonuses if they are not worth being retained?
This is why I have started United Shareholders of America – to rid ourselves of the most flagrant management abuses that have gotten many companies into trouble in recent months and years. But it is only when large numbers of people join in our cause will we be effective. Join USA by signing up on my blog, the Icahn Report. www.icahnreport.com.