Marketplace Scratch Pad

Grosser than gross

Scott Jagow Jan 11, 2010

Today, New York Attorney General Andrew Cuomo asked eight major banks to give him the details of their bonus payouts. Cuomo wants to see if the banks have indeed changed their bonus culture or whether they’re just paying lip service to change. While he’s at it, he might want to ask about tax gross-ups.

What’s a gross-up? It’s an executive perk in which the company takes care of an employee’s tax bill. Here’s the Business Dictionary’s definition:

To pay the full amount, without any deductions. This phrase is most frequently used in terms of salary; an employee can receive their salary grossed up, which means that they would receive the full salary promised to them, without deductions for tax. However, since salary must be taxed by law, the company would gross up the employee’s salary so that after taxes they receive the full salary promised.

At Daily Finance, Michelle Leder of Footnoted.org writes:

… it’s pretty hard to imagine something much grosser than a tax gross-up. It smacks of the type of entitlement that most reasonable, red-blooded capitalists would normally rage against. Yet it has been a routine part of many executives’ employment agreements and M&A deals for quite some time.

The argument in favor of the gross-up is that executives should be “made whole” for their taxes so that they don’t wind up getting less money than they should. But using that theory, shouldn’t there be a gross-up when you sell 100 shares of stock or your house for a profit (back in the days when that was still a possibility)?

Leder says several companies — from Walgreen to Kohl’s to Jack in the Box — have done away with tax gross-ups or changed their policies on them.

But Goldman Sachs clearly isn’t in that group. Sky News says the bank is using gross-ups to protect employees from Britain’s one-time 50% bonus tax:

Goldman Sachs, the US investment bank, is moving towards a decision that rather than passing the cost of the tax onto employees by absorbing it within the year-end bonus pool (which would automatically mean paying out less money to staff), it will instead gross up its bonus pool so that the bank pays the cost of the tax itself. So, for example (and these numbers are for illustrative purposes only), if Goldman is liable for a £400m tax bill on a UK bonus pool of £1bn, the bank will simply allocate £1.4bn rather than £1bn to bonuses for UK-based staff.

Meanwhile, the “catch” for employees continuing to get the royal Goldman bonus treatment is that the bank might start requiring its employees to give to charity. From the New York Times:

While the details of the latest charity initiative are still under discussion, the firm’s executives have been looking at expanding their current charitable requirements for months and trying to understand whether such gestures would damp public anger over pay, according to a person familiar with the matter who did not want to be identified because of the delicacy of the pay issue.

The charity idea would be similar to a decades-long program at the failed investment bank Bear Stearns, which required more than 1,000 of its top workers to give 4 percent of their pay to charity each year and then checked their tax returns to ensure compliance.

What do you think of Goldman’s idea? What about tax gross-ups? Should they be banned?

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