Andrew Liazos, writing for CFO magazine, argues that a law enacted years ago in response to Enron poses new tax risk for deferred compensation in that Section 409A could inhibit desirable restructuring of executive pay in response to possible “say on pay” no votes.
A 2009 notice from the IRS granted special relief to TARP recipients, stating:
the application of 409A(a) in these circumstances would produce a disincentive for TARP recipients to comply with the Special Master’s advisory opinions and act in accordance with the public interest, severely diminishing the Special Master’s ability to fulfill his intended role and damaging the entire TARP program.
However, no such relief has been granted to other companies now that say on pay is more widespread. Liazos concludes,
This situation is yet another instance of Congress creating unnecessary complexity for public companies by enacting ill-conceived tax legislation in reaction to perceived abusive executive pay practices. Great care is required to navigate the conflict between Section 409A and evolving corporate-governance standards for executive compensation.
The issue is too complicated for me to cover briefly here, so I suggest those interested investigate further, starting with the CFO article, Ghost of Enron Wreaks New Havoc on Exec Pay, 6/13/2011.
I’ll be returning to work on the draft say on pay guidelines in collaboration with other members of the United States Proxy Exchange as soon as a do a few posts on this year’s Yale Governance Forum (best yet). Therefore, I note the Liazos article also briefly highlighted a few evolving corporate-governance issues around executive compensation, including the following:
- Excessive Supplemental Early Retirement Plans (SERPs) and perquisites;
- Liberal triggering events for large severance benefits;
- Tax gross-up payments for golden-parachute payments and perquisites; and
- Multiyear guaranteed incentive-compensation awards.
I wonder if we should be including such concerns in the USPX pay paper. Too many factors will reduce the likelihood that retail shareowners will use the guidelines. On the other hand, more factors at least makes guidelines look more precise. We’re still looking for more comments on the draft and if you haven’t taken a look at those to date, I think you’ll be impressed when you do.