Interpretation of Law Could Lead to Ban on Range of Executive Perks
Top executives at public companies soon may not be able to use company credit cards, get as much life insurance or exercise stock options in the way they’re accustomed to--all possible consequences of the sweeping corporate reform bill recently passed by Congress.
When Congress swiftly passed the Sarbanes-Oxley Act late last month to crack down on executives and accountants who knowingly falsify company financial statements, legislators didn’t appear to be aiming at some of these ancillary issues, industry experts say. But due to broad wording in the bill that bars all loans to officers and directors of public companies, life in the executive suite could change in myriad ways.
Whether those changes will lead to a more far-reaching restructuring of how executives are paid is an open question.
“Many of the provisions in the law require the Securities and Exchange Commission to issue regulations, so people are reluctant to say whether some of these things are certain,” said Edward Rhyne, a partner in the Houston law firm Gardere Wynne Sewell. “But executives who are in high demand may want more cash compensation upfront because they are not going to be able to get the perks that they had in the past.”
This isn’t the first time congressional efforts to rein in executive pay have yielded what may be unintended consequences, said Diane Doubleday, principal at Mercer Human Resource Consulting in San Francisco.
When corporate takeovers were sweeping the country in the early 1980s and executives were getting paid millions as they were forced out in the wake of mergers, Congress acted to put a lid on so-called golden parachutes, Doubleday said.
The law created penalties for severance packages that exceeded three years of an executive’s pay. But instead of creating a hurdle, the law built a standard, she said. Now, companies commonly pay out three years’ salary and bonus when executives leave after a merger--some pay even more and simply accept the penalties.
The same thing happened when legislators, incensed by the rapid rise in chief executive salaries, tried to pare the number of seven-figure salaries by banning tax deductions for pay exceeding $1 million, unless the pay was “performance-based.” Companies used the $1 million as a floor for CEO salaries and heaped incentive compensation on top of it, she said.
Now, attorneys and consultants are speculating about how the Sarbanes-Oxley Act will affect everything from company-paid life insurance policies to stock option grants for the fortunate few who work in top-level positions at public companies.
Life Insurance Plans Could Be Affected
Congress intended to stop companies from using company funds to make huge loans to top executives, which clearly is an inappropriate use of corporate assets, Doubleday said.
The broad ban on loans, however, also appears to apply to so-called split dollar life insurance arrangements. Companies pay the premiums on these policies, calling the payment a loan because the executive’s heirs are contractually obligated to pay back the premiums from the proceeds of the death benefit when the executive dies.
Certain types of executive signing bonuses also may be outlawed, Doubleday said. Why? Some require repayment if the executive quits within a set period, and that could be interpreted as a loan under the new law.
Relocation loans for the top five officers of a company also could be out. And unless a company was in the business of issuing credit, it couldn’t even give its top officers a credit card, Rhyne said.
In addition, so-called cashless exercise programs for stock options might be viewed as short-term loans, banned under the law, experts contend. In these cases, when an executive exercises stock options by buying and then quickly selling shares of his company’s stock, the company often will transfer the shares to a broker before it receives payment for the stock from the executive. Under the Sarbanes-Oxley Act, this transaction could be considered a short-term loan.
It’s not clear whether Congress intended to take away these other perks when it slapped a ban on company loans to corporate bigwigs, but such a result wouldn’t be unwelcome by corporate governance critics who have been complaining about the lavish compensation packages bestowed on many American executives.
By the same token, these results are speculative because securities regulators are charged with interpreting the muddier aspects of the law.
“Where there is a fuzziness, the SEC is going to have to clarify it,” said Frank Torres, legislative counsel at Consumers Union in Washington.
“I am confident that where it’s not so much a question of corporate shenanigans versus a reasonable way to treat executives, the regulations will resolve it.”
