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Disney withdraws executive tax benefit amid criticism

March 18, 2011 |  2:47 pm

Just days before investors would have their say on Walt Disney Co.’s executive pay, the entertainment giant changed the contracts of its top executives to remove a generous perk that had come under fire from an influential shareholder advisory firm.

The company said it would no longer pay the taxes on any severance package for Chief Executive Robert A. Iger and three other senior executives in the event they lost their jobs in a sale or merger of the Burbank entertainment company.

Institutional Shareholder Services, an advisor to large shareholders, had recommended voting against the compensation packages of Iger and the others that would have required Disney to reimburse the executives for an excise tax. The tax would kick in in the event that the severence pays them more than triple their annual salaries.

Disney’s move drew praise from corporate-governance experts, who said such benefits seem as though Disney had been trying to skirt Internal Revenue Service guidelines designed to protect shareholders.

"Why would the IRS put a limit on golden parachutes? They don't think they should exceed a certain amount," said Paul Hodgson of GovernanceMetrics International, which provides independent research on corporate governance issues. "If companies say, 'I'm going to do what I like and pay the tax for the employees so they don't have to suffer for it,'" he said, those companies are "sticking one finger up at the IRS and their shareholders."

Disney initially tried to persuade shareholders to ignore the guidance of Institional Shareholder Services, claiming in a March 2 letter that the recommendation was "unwarranted." The company argued that board's compensation committee had already adopted a policy to omit such perquisites in future employment agreements, "in response to feedback from shareholders."

But as the March 23 date nears for the company's shareholder meeting in Salt Lake City, Disney reversed course. On Friday, the company filed documents with the Securities and Exchange Commission stating that it had removed the controversial provision, known as an excise tax gross-up, from the existing contracts of Iger, Chief Financial Officer James A. Rasulo, General Counsel Alan N. Braverman and Parks and Resorts Chairman Thomas O. Staggs.

Disney spokeswoman Zenia Mucha said the changes were made to conform with the policy the board had adopted for future contracts.

In the wake of Disney’s action, Institutional Shareholder Services said it would recommend that shareholders vote in favor of Disney’s executive compensation.

"It's interesting that they ended up caving," Steven Hall, managing director for executive
compensation consultant Steven Hall & Partners, said about Disney. "We were surprised by how violently they reacted against  ISS. It was the kind of thing companies gripe about in boardrooms but don't do anything about."

Hodgson said Disney has been working hard to improve the public perception of its executive compensation since the days of former Chief Executive Michael D. Eisner, who in fiscal 1998 reaped $576 million when he exercised stock options he had accumulated for years.

For the first time, shareholders of about 5,000 publicly traded companies will have the opportunity to cast a nonbinding vote on the pay and benefits extended executive officers under the requirements of the federal Dodd-Frank Wall Street Reform and Consumer Protection Act. The law was adopted after the collapse of Lehman Bros. in 2008 triggered a global financial meltdown.

"It really raises the stakes," Hodgson said. "It allows shareholders to exert some considerable influence on a company if it is adopting a compensation policy that is out of favor, and tax gross-ups in general have been out of favor for some time.”

-- Dawn C. Chmielewski

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