Michael Francese spoke with Agenda about the Biden Administration’s impact on compensation committees. Mr. Francese says, “Biden’s platform is pretty vague on compensation matters.” He says Biden is “very focused” on tax rates for individuals, corporations, and estates. “Those will all kind of filter into compensation decisions,” he adds.
He adds if any quick decisions on bonuses do occur in the last one to two months of 2020, “that would only happen around the margins. It would just be too soon after the election to figure out what’s going to happen unless folks really think that the Democrats would move quickly.”
In fact, Mr. Francese is not anticipating too many boards will make any immediate changes post-election. He points to reports from the Urban-Brookings Tax Policy Center, which has forecast that any potential tax changes will not be implemented until the beginning of 2022. Rather, he expects that compensation committees will have an eye on what happens, if anything, to deferred compensation.
“I think there would be some pressure if there are higher tax rates but deferred comp is still in play,” Mr. Francese says. “I think deferred comp vehicles may become much more attractive.”
He believes there’s a chance that deferred compensation rules could be eliminated, citing the 2017 Tax Cuts and Jobs Act, which initially jeopardized deferred compensation, although the change in the law was ultimately not made.
He thinks it could certainly come up again that Section 409A of the Internal Revenue Code, which allows for deferred compensation, would be eliminated because the government will want to collect that tax revenue when stock vests, versus at a later date. “I think those things are all potentially at play, because otherwise, I think you would see a heavy movement toward deferred comp, where executives say, ‘Well, we’ll just ride this out.’”
If the option for compensation committees to allow deferred compensation goes away, Mr. Francese thinks, “that’s a challenge for boards.” Shareholders prefer to see executives invested in the company’s long-term goals, but if corporations and executives are taxed at the time the stock vests, he believes, it will become more difficult to justify long-term incentives to executives who are expected to look out for shareholders’ long-term interests while being subjected to taxes on compensation they won’t receive for some time.
“If everything is taxed, why do they have to have these really long vesting schedules, which are difficult to manage?” Mr. Francese asks. “If you pay the pay immediately, everything has a short-term focus, which is not ideal from a board standpoint or a long-term governance standpoint. Nobody wants to be taxed in 2022 and not receive that money until 2025. That’s not a good result for anybody.”
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