If there’s anything good you can say about the terrible economic downturn we’re in, it’s this: Tough times force people to make tough decisions that they might not otherwise make. And that’s why I’m happy to find so many corporate boards that are finally showing some backbone and killing one of the most insidious and pernicious executive perks of all—the executive “gross-up.”

I can’t think of a single executive benefit that more clearly delineates the huge gap that exists between top executives and their employees. In my mind, it’s an egregious benefit that gives full meaning to the phrase “the rich get richer,” and I say that as someone who once received a gross-up and felt guilty about it.

Here’s the gist of what I’m talking about, courtesy of The Wall Street Journal: “As the recession fuels outrage over executive-pay excesses, 43 companies in Standard & Poor’s 500-stock index will stop paying certain taxes for their top brass this year, according to a review of 2009 regulatory filings for The Wall Street Journal by compensation-research firm Equilar Inc. The change comes amid increased investor criticism of the ‘gross-up’ payments, which cover the tax bite for a variety of perks, including club memberships and personal use of corporate jets, as well as golden parachutes following takeovers.”

Yes, let me make this perfectly clear: It’s not enough for top executives to get country club memberships and personal use of the corporate jet as part of their compensation package. In addition to those goodies, the company agrees to add to the executive’s pay in order to cover the additional taxes that might be payable on such a perk.
 
This is one of those hard-to-believe benefits, and I was stunned the first time it happened to me. It was back in the early 1990s when I went to work for newspaper giant Gannett as editor of the company’s statewide newspaper in Great Falls, Montana. The company paid for my move from Southern California, and one day, the HR director came by and handed me a check for something like $3,000 to cover taxes I might have to pay as a result of my relocation.

I was flabbergasted, and asked him what I had done to get this. He said it was just corporate policy for all executives. It happened to me again a few years later when Gannett transferred me from Montana to Hawaii as executive editor of The Honolulu Advertiser. The gross-up on that move was more in the $5,000 range, as I recall, but both times I was left wondering why the people making the most money should have their taxes covered on some really great benefit. It just didn’t make sense then, and it still doesn’t.

So, why does it continue? According to the Journal, “Companies say gross-up payments are sometimes necessary to recruit executives … but activist investors contend that tax reimbursements represent another example of treating the top brass like royalty. ‘There’s no pay-for-performance connection at all,’ says Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees union. ‘All Americans are subject to taxes except executives who have found a way to avoid them.’ ”

The silver lining in this story is that many corporate governance experts believe that elimination of the executive gross-up will spread. Many boards, according to the Journal, view the present economic environment as a “once-in-a-lifetime opportunity to remove abusive compensation practices, says Patrick McGurn, special counsel for proxy adviser RiskMetrics Group Inc., which recently added gross-ups to its list of poor executive-pay practices.”

Executives need to be paid fairly, but the system has gotten way out of whack when the top person in a company gets paid 300 or 400 times more than the average floor worker the organization. I don’t think any reasonable person thinks that makes sense, and the gross-up is just more of the same. It’s a benefit for someone who doesn’t need more benefits, and who can damn well pay taxes on the ones they already get.

We live in an environment where there’s no risk to being an executive. You get paid a huge chunk if you perform well, and a slightly smaller huge chunk if you fail—like Rick Wagoner at General Motors, or like management whiz Phillip Schoonover, the CEO who ran now-defunct electronics retailer Circuit City into the ground.

If McGurn is right, and boards are indeed whacking away at lousy executive pay practices, we can only hope that the gross-up is one of those pernicious perks that end up, finally, on the cutting room floor.

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