LIU, NYC PENSION FUNDS CALL FOR END TO GOLDEN PARACHUTES
Massive Change-in-Control Payments to Executives Leave Pensioners Holding the Bag
Comptroller John C. Liu and the New York City Pension Funds has called on four corporations to rein in excessive payments to executives resulting from corporate mergers and acquisitions.
"These payments have upgraded golden parachutes into platinum parachutes at the expense of retirees and pensioners," Comptroller Liu said. "The shareholders suffer when these parachutes get out of control. It's adding insult to injury when taxpayers are ultimately forced to foot the bill for these bloated executive payouts and then cover the executives' tax bill."
Corporate mergers and acquisitions trigger what are known as change-in-control payments to executives. When the payments reach a certain ceiling, a 20% excise tax kicks in. Most corporations agree to cover this excise tax along with the resulting income taxes for the executives.
The cost to corporations can triple when they agree to cover the executives' taxes. RiskMetrics Group reports that the average potential change-in-control payment at corporations that cover executives' taxes was $72.5 million in 2008.
The request was made in shareholder proposals submitted to Anadarko Petroleum Corp. (NYSE: APC), NewAlliance Bancshares, Inc. (NYSE: NAL), R.R. Donnelly & Sons Co. (NASDAQ: RRD), and WellPoint, Inc. (NYSE: WLP).
The Comptroller also submitted, but subsequently withdrew, the proposals at AES Corporation (NYSE: AES) and Motorola Solutions, Inc. (NYSE: MSI). Both corporations adopted key portions of the Pension Funds' request and will no longer pay tax bills for executives under any new or changed employment agreements.
Shareholders will vote on the NYC Pension Funds' proposal during the firms' spring 2011 shareholder meetings.
The New York City Comptroller serves as the investment advisor to, custodian and trustee of the New York City Pension Funds. The New York City Pension Funds are comprised of the New York City Employees' Retirement System, Teachers' Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System. The New York City Pension Funds hold a combined 7,485,610 total shares in AES Corporation (NYSE: AES), Anadarko Petroleum Corp. (NYSE: APC), Motorola Solutions, Inc. (NYSE: MSI), NewAlliance Bancshares, Inc. (NYSE: NAL), R.R. Donnelly & Sons Co. (NASDAQ: RRD), and WellPoint, Inc. (NYSE: WLP) for a combined asset value of $289,606,820.15 as of 2/8/2011.
---
TEXT IN-FULL OF SHAREHOLDER PROPOSAL:
LIMIT CHANGE-IN-CONTROL PAYMENTS
Submitted by John C. Liu Comptroller, City of New York, on behalf of the Boards of Trustees of the New York City Pension Funds & Retirement Systems
RESOLVED: Shareholders request that the Board of Directors adopt a policy limiting change-in -control payments to any senior executive to no more than 2.99 times the five-year average of the executive's taxable compensation, including bonuses, other incentive payments, and other taxable payments triggered by a change in control.
SUPPORTING STATEMENT
Under the U.S. tax code, in addition to regular income tax, a 20 % excise tax is triggered if change-in-control payments made to executives exceed three times their average taxable income during the five years prior to the change in control. The tax is levied on payments above one times such income. If the tax is triggered, companies also lose a substantial tax deduction for the payouts.
A 2009 analysis by RiskMetrics Group of the 2008 proxy statement disclosures of S&P 500 companies found that the majority of companies (329) agreed to cover executives' excise taxes that are levied on such excessive change-in-control payments. Estimates suggest that 50 or more persons in an organization could be entitled to change-in-control payments and tax gross ups, and as high as 80 percent of new employment agreements may provide for tax gross ups. RiskMetrics' analysis found that the average potential change-in-control payments to top executives of companies providing the benefit stood at $72.5 million as of 2008, 65% higher than the average payment of $43.9 million reported by the 168 companies that do not provide the benefit.
A change-in-control event such as a merger or an individual or group acquiring a specified portion of the company's stock - sometimes as low as 30 percent, often triggers other payments that may push the final total change in control payments above the 2.99 times.
When companies grant excessive change-in-control payments to executives, then cover the executives' related excise taxes, and their regular income taxes as well (tax gross ups), the shareholders ultimately bear this costly burden.
Proxy rating agencies such as RiskMetrics and Governance Metrics International consider change-in-control payments of three times or more of an executive's base compensation to be excessive and evidence of poor pay practices. The Emergency Economic Stabilization Act of 2008 prohibits companies receiving government aid from the Trouble Asset Relief Program from providing severance payments exceeding three times an executive's salary.
By reducing change-in-control payments, companies would avoid triggering the excise tax and the loss of the tax deduction, thereby, protecting the investment interests of their shareholders.
---
In addition to Comptroller Liu, the New York City Pension Funds trustees are:
New York City Employees' Retirement System: Ranji Nagaswami, Mayor's Representative (Chair); New York City Public Advocate Bill de Blasio; Borough Presidents: Scott Stringer (Manhattan), Helen Marshall (Queens), Marty Markowitz (Brooklyn), James Molinaro (Staten Island), and Ruben Diaz, Jr. (Bronx); Lillian Roberts, Executive Director, District Council 37, AFSCME; John Samuelsen, President Transport Workers Union Local 100; Gregory Floyd, President, International Brotherhood of Teamsters, Local 237.
Teachers' Retirement System: Ranji Nagaswami, Mayor's Representative; Deputy Chancellor Kathleen Grimm, New York City Department of Education; Mayoral appointee Tino Hernandez; and Sandra March, Melvyn Aaronson and Mona Romain, all of the United Federation of Teachers.
New York City Police Pension Fund: Mayor Michael Bloomberg; New York City Finance Commissioner David Frankel; New York City Police Commissioner Raymond Kelly (Chair); Patrick Lynch, Patrolmen's Benevolent Association; Michael Palladino, Detectives Endowment Association; Edward D. Mullins, Sergeants Benevolent Association; Thomas Sullivan, Lieutenants Benevolent Association; and, Roy T. Richter, Captain's Endowment Association.
New York City Fire Department Pension Fund: Mayor Michael Bloomberg; New York City Fire Commissioner Salvatore Cassano (Chair); New York City Finance Commissioner David Frankel; Stephen Cassidy, President, James Slevin, Vice President, Robert Straub, Treasurer, and John Kelly, Brooklyn Representative and Chair, Uniformed Firefighters Association of Greater New York; John Dunne, Captains' Rep.; James Lemonda , Chiefs' Rep., and James J. McGowan, Lieutenants' Rep., Uniformed Fire Officers Association; and, Sean O'Connor, Marine Engineers Association.
Board of Education Retirement System: Schools Chancellor Cathleen Black, Mayoral: Philip Berry, Gitte Peng, Robert Reffkin, Tino Hernandez, Joe Chan, Tomas Morales, Linda Laursell Bryant, and Lisette Nieves; Patrick Sullivan (Manhattan BP), Gbubemi Okotieuro (Brooklyn BP), Dmytro Fedkowskyj (Queens BP), Joan Correale (Staten Island BP), and Monica Major (Bronx BP); and employee members Joseph D'Amico of the IUOE Local 891 and Milagros Rodriguez of District Council 37, Local 372.