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'Gross-ups': A way to keep golden parachutes shiny

BY TAMI LUHBY | Newsday Staff Writer

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North Fork Bank chief executive John Kanas has long been one of the highest-paid executives on Long Island, but the size of his payout from the bank's merger with Capital One surprised even some compensation industry insiders.

The vast majority of the nearly $218 million Kanas will receive in the merger comes from a little-known provision called a "gross-up." To Kanas, the gross-up is worth an estimated $188 million.

But he isn't the only Long Island executive to have this sweet perk written into his or her contract.

Gross-up provisions require a company to pay the additional taxes on various elements of an executive's compensation, particularly stock grants and severance packages. Sometimes the company reimburses executives for taxes incurred on various perks, such as country club memberships.

Companies began including gross-ups in compensation packages after Congress in the 1980s added an additional 20 percent excise tax on lucrative severance packages. The excise tax is triggered if the executive receives more than three times his or her average annual compensation for the previous five years, and it applies to all severance compensation exceeding one year at that average rate.

"It is horrifically expensive for the company," said Alan Johnson, who heads Johnson Associates, an executive compensation company in Manhattan. "Boards are always surprised at how much it costs."

The dollar value of this provision, however, is difficult to find in a company's federal filings and is not included in the executive compensation table. So shareholders often are shocked at the amount of money the company has to pay if the gross-up is triggered.

Gross-ups are quite common, compensation experts say. About three-quarters of Fortune 500 companies have them.

"It's a philosophy," said Paula Todd, managing director at Towers Perrin, a human resources consulting firm based in Stamford, Conn. "The company is saying it wants executives with X amount of money and doesn't want a penalty tax to alter what the executive gets."

On Long Island and in Queens, at least 17 of the largest public companies have gross-up provisions, including Arrow Electronics, Standard Microsystems, Nathan's Famous and Astoria Federal Savings Bank.

Kanas has said the reason his gross-up payment is so large is that he was barred from exercising his restricted stock awards until his retirement, death or a change in control of the bank. But another reason it's so much is that North Fork will pay Kanas' income taxes on the stock, in addition to the excise tax -- an unusual provision.

Some companies have moved away from gross-ups. At Arrow, for instance, the top 200 executives used to be reimbursed for a portion of their income taxes when their restricted stock awards vested. For chief executive William Mitchell, for instance, this amounted to $53,438 in 2005.

But when the compensation committee recently overhauled how executives are paid, it eliminated the gross-up provision, said Paul Reilly, Arrow's chief financial officer.