Human Capital & Careers

Most Large Company CEOs Enjoy Gross-ups

By contrast, just 29 percent of CEOs among Nasdaq-listed companies are eligible for this perk.
Stephen TaubNovember 17, 2005

Some executives are apparently more equal than others.

A new study reveals that nearly three-quarters of the chief executive officers at large U.S. companies have “gross-up” provisions written into their severance package agreements. Essentially, the gross-up shields executives from tax consequences by reimbursing them for any excise tax incurred on severance packages.

During the 1980s, Congress levied a 20 percent excise tax on golden parachutes that exceed certain thresholds. But for many years, companies have circumvented the rule by agreeing to pay the excise tax on behalf of their executives if the threshold was breeched during a change of control.

According to a new study from consultancy Frederic W. Cook & Co., 72 percent of the CEOs of the 50 largest (by market value) New York Stock Exchange–listed companies receive gross-ups, reported The Wall Street Journal. The survey includes such companies as Chevron and Home Depot.

By contrast, just 29 percent of CEOs among Nasdaq-listed companies are eligible for this perk, according to the paper. They include Gilead Sciences Inc. and Sirius Satellite Radio Inc.

In general, Cook found that 90 percent of Nasdaq companies and 80 percent of NYSE companies offer some form of change-in-control compensation. This could include a cash payment — usually a multiple of annual cash compensation — or some sort of stock incentives, the Journal elaborated.

The paper pointed out that most Big Board companies pay three times annual cash compensation, while Nasdaq companies seem to pay just two times compensation or less, probably because they are smaller.

The Journal noted that some companies, sensitive to the controversy over gross-ups, are setting up what are called “modified gross-ups.” Under these provisions, the companies — under certain circumstances — will scale back the severance so that no taxes are owed.

4 Powerful Communication Strategies for Your Next Board Meeting