Author: ERI

Executive Compensation: Which Companies Are Proactive with Say-On-Pay?

Posted on | by ERI

With the heightened sensitivity toward executive compensation pay levels, there have been recent announcements indicating that companies are adjusting pay decisions relative to their organization’s performance and overall economic conditions. Some announcements related to executive compensation show that companies are proactively adapting.

  • Bank of America kept the base salary of CEO Brian Moynihan flat at $950,000, but his pay package will include $9.05 million in restricted stock units.  No senior executives will receive cash bonuses.  Three other senior executives at the Charlotte, N.C.-based bank are getting salary increases of 6.25 percent, to $850,000 from $800,000, in addition to stock awards.
  • In January 2011, Citibank reported a $10.6 billion profit for 2010 and announced that the base salary of its CEO, Vikram Pandit, was adjusted to $1.75 million.  In 2008, Citibank received a $45 billion bailout from taxpayers and soon after, in February 2009, the CEO reduced his pay to $1.00 until the firm returned back to profitability.  Pandit declined a bonus for the 2010 performance year.

Also encouraging, some companies recently took say-on-pay requirements into consideration during their annual shareholders meetings:

  • Becton, Dickinson held its annual shareholder meeting on February 1, 2011, and its shareholders approved management’s say-on-pay proposal regarding executive compensation and voted to hold say-on-pay votes annually.
  • At Monsanto’s annual meeting on January 25, 2011, the agriculture company’s investors voted for an annual advisory vote on executive compensation: 62.2% for annual, a 35.9% for triennial, 1.4% for biennial, and 0.5% abstentions.  The Board announced they would implement the annual advisory vote on executive compensation although it was non-binding.

With the advent of say-on-pay requirements, we will continue to see more collaboration between Boards of Directors and shareholders, as well as alignment of executive compensation decisions with shareholders and pay-for-performance relative to external market conditions.

Executive Compensation: Say-On-Pay

Posted on | by ERI

This week the SEC approved the non-binding Say-On-Pay rule. This is one component of the executive compensation provision of the Dodd Frank Act, a comprehensive financial regulatory reform enacted due to the collapse and near demise of many industry giants, like Lehman Brothers and AIG. The executive compensation provisions are intended to discourage companies from awarding lucrative packages that encourage risky behavior. Other components of the executive compensation provision include clawbacks (e.g., recouping executive compensation in the event of an accounting restatement), compensation committee and adviser independence, enhanced compensation disclosures, and corporate governance.

Shareholders can now vote on executive compensation packages, at minimum, once every three years. They also will have separate nonbinding votes on golden parachutes, which are compensation arrangements with executive officers in connection with merger transactions. The timeline for implementing the new rules is set for 2011 annual meetings for public companies with public investors owning greater than $75 million worth of shares. Smaller companies will have until 2013.

Although the Say-On-Pay rule is nonbinding, companies must disclose in public filings whether they followed the shareholder vote. If the Board does not make adjustments to executive compensation based on the shareholder vote, it may face negative repercussions like dissension between the Board and shareholders, the wrath of major shareholder advisory firms, a negative impact on investor confidence and public image, and directors may not get re-elected. In the UK, a similar rule has been in place since 2002 and, as a result, has more effectively linked pay to performance, improved communication among boards, management, and institutional investors, and aligned shareholders and management.

Currently, there are some 80 companies that have already implemented Say-On-Pay prior to this recent SEC approval. To date, shareholders at only three companies — Motorola, Occidental Petroleum, and KeyCorp — have voted against executive compensation packages.  Shareholders have voted against tax gross-ups, in which executives receive compensation to reimburse them for taxes on perquisites.

How should companies prepare to implement say-on-pay?

  • Establish formal communication plans
  • Proactively identify potential executive pay issues and concerns in advance
  • Make transparent the rationale behind their executive pay programs in the proxies’ Compensation Discussion and Analysis section
  • Partner with proxy advisors
  • Work with key institutional shareholders

Nonprofits Can Avoid IRS Scrutiny – Pay and Report Correctly

Posted on | by ERI

The IRS wants nonprofits to comply with rules and regulations for tax exempt organizations, particularly on executive compensation and employment-related payments. Enforcement efforts, as reported in the December 2010 Exempt Organizations Division (EO) annual report have been stepped up.

  • Audits of exempt organizations increased from 7,861 in FY 2008 to 10,187 in FY 2009 (a 30 percent rise) and to 11,449 in FY 2010 (up another 12 percent).
  • Compliance checks (i.e., EO asks about a specific item on a Form 990 or for more information on an organization’s operations) are also being used extensively. They require fewer resources and, as the report delicately puts it, enable the IRS to “touch more organizations than by using an exclusively exam-based strategy.”
  • Collaborations with the Social Security Administration and the states allowed EO to identify nonfilers and noncompliant organizations more effectively.

Increased enforcement is possible because of more EO staff – from 837 positions in FY 2008 to 910 in FY 2009, with another increase to 942 in FY 2010. Notably, 95% of these new positions were in Examinations. Want to steer clear of the IRS? No guarantees, but here are some suggestions:

  • Set your executive compensation according to IRS requirements.
  • Make sure that what’s reported in compensation on Form 990 matches what is reported to other federal agencies.
  • Correctly report and transmit income taxes and other payments related to employees, such as Social Security and unemployment compensation (if required).
  • If loans have been made to executives, trustees, and other key employees, be aware that IRS will be reviewing them and be sure to report accurately.
  • E-file. It is easy and typically inexpensive. But even more important, it eliminates the possibility of the most common mistakes – the software won’t let you make math errors, forget to attach or complete required schedules, or fail to sign the return. Check out the free or low cost software at http://efile.form9