Its Gold Star Friday!

The filings are pouring in fast and furiously today, but the footnoted staff is taking time out to share some celebratory news that’s definitely worth a gold star— maybe even two!

We—ve come across several companies that are eliminating one of the grossest perks out there — the tax gross-up. Anyone who wades through proxies on a regular basis knows exactly how bad these gross-ups can get, sometimes costing companies millions of dollars. (Think we’re exaggerating? Take a peek at p. 66 of AMAG Pharmaceuticals, Inc.’s recent proxy; at “senior management’s request,” the company agreed to pay gross-ups for most of its executives up to a $1 million cap, and pay gross-ups for President/CEO Brian Pereira up to a $3 million cap. And at Merck & Co., Inc. – which is eliminating gross-ups “as soon as possible under applicable arrangements” – if a change in control occurs before February 14, 2011, the company is on the hook to pay gross-ups for its various NEOs that range between $3.1 million and nearly $5.3 million.)

If you think of an ice cream sundae as a metaphor for your basic executive compensation package, you—ve got all the basic stuff — the salary, bonus, stock awards, option awards, non-equity incentive comp, and so forth — in a gigantic bowl filled with six scoops of ice cream, three flavors of syrup, nuts, whipped cream, and sprinkles. The perks are supposed to be the cherry on top, which means that the gross-up payment is a cherry sitting on top of the other cherry. It’s overkill.

So kudos to the companies that are coming around and eliminating the gross-up. Based on recent filings, we’re bestowing our accolades on:

Jo-Ann Stores, Inc. (JAS), which stated in its recent proxy (p.48): —Historically the company provided tax gross-ups in connection with the tax and financial planning services, but this practice has been terminated effective as of January 1, 2010 because we believe it is inconsistent with developing corporate governance standards.

The Home Depot Inc.—s (HD) recent proxy notes that it eliminated gross-ups on all perks in FY 2009.

Several companies’ 8-Ks announced that they would not enter into any new or amended employment agreements with NEOs that obligate the company to pay a gross-up on any payments that are made if there is a change in control. Those include:

Meanwhile, PG&E Corporation (PCG) took a hybrid approach. In an April 21, 2010 letter to shareholders, the company wrote that since its last annual meeting the board and compensation committee had ——adopted and implemented a number of policies that have strengthened the Corporation’s governance practices regarding executive compensation. Its new policy includes: “The elimination of tax gross-up payments made in connection with executive compensation, except for (i) those that are part of benefit programs offered to all employees, and (ii) obligations under pre-existing change in control agreements;”

And AK Steel Holding Corp. (AKS) recently filed a proxy in which it disclosed that, effective January 1, 2010, it eliminated the gross-up payment that it had previously paid to its CEO to cover the taxes he owed on his personal use of the company plane. (See? We—ll even praise baby steps in the right direction!) It noted: —The rationale for this change was to update the Company’s policy with respect to personal use of the Company plane by the Chief Executive Officer to make it consistent with current best practices.

So — bravo to these forward-thinking companies that are taking steps to improve their executive compensation practices. If we could, we’d treat you to an ice cream sundae to help you celebrate your gold star award. (One cherry per sundae, please.)


Please help footnoted improve by taking our annual survey. Reader feedback is important to us. All questions are optional, but we will choose one winner at random for a free quarterly subscription to FootnotedPro, a $3,000 prize.