Survey Reveals Board Attitudes on CEO/Median Employee Pay Ratio, Cadillac Tax, Disclosure of Political Contributions, Audit Committee–Auditor Communications and More
Chicago, IL – According to a new survey by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, approximately three-quarters (74 percent) of public company Board members do not believe the pending CEO–median employee pay ratio will be a meaningful disclosure for investors, while a similar percentage (72 percent) are in favor of the SEC’s proposed “claw back” rule requiring businesses to recoup senior executives’ incentive pay when material errors result in a financial restatement. An overwhelming majority (86 percent) of directors are against the proposed mandatory disclosure of audit committee-auditor communications and, perhaps surprisingly, a narrow majority (53 percent) are in favor of the SEC developing mandatory disclosure rules for corporate political contributions.
These are just a few of the findings of the 2015 BDO Board Survey, conducted by the Corporate Governance Practice of BDO USA in September 2015. The annual survey examines the opinions of 150 corporate directors of public company Boards regarding financial reporting, executive compensation, tax planning and other corporate governance issues.
Political Contributions. Since a 2010 U.S. Supreme Court ruling removed restrictions on political contributions, many shareholder groups have argued that businesses should disclose these contributions. Although some companies voluntarily disclose corporate political spending voluntarily, a majority (53 percent) of public company Board members believe that the SEC needs to develop mandatory disclosure rules for corporate political contributions.
Audit Committee-Auditor Communications. When asked about the SEC concept release that would require disclosure of communications between the audit committee and the external auditor, an overwhelming majority (87 percent) of corporate directors reported believing such disclosures would have a negative impact on the audit committee-auditor relationship.
“Given proposals from shareholder activists for more transparency with regard to campaign contributions and a growing trend of companies self-reporting such information, Board members appear to be getting more comfortable with the idea of mandatory disclosure of political contributions,” said Amy Rojik, Partner in the Corporate Governance Practice at BDO USA. “In contrast, directors are clearly not in favor of mandated disclosure of audit committee communications with the external auditor. This is consistent with the comment letters the SEC has received on this proposal, as Boards are sensitive to how such disclosures may have the unintended consequence of chilling communications between their audit committees and the external auditors.”
CEO–Median Employee Pay Ratio. Beginning with 2018 proxies, public companies will be required to disclose the ratio of median employee pay to CEO compensation. This 2018 requirement will report on 2017 compensation. When asked if their Boards had begun to take steps to comply with this new requirement, directors were split. A large minority (43 percent) are familiar with the new requirement but have taken no actions, while a similar percentage (39 percent) are already preparing pay ratio calculations for internal planning purposes – though they will not disclose the ratio prior to the required disclosure date. Relatively few (8 percent) say they are planning to disclose the pay ratio calculation prior to the mandatory disclosure date. Surprisingly, 10 percent of the directors say they are still unfamiliar with the requirement.
When asked about their greatest concern with the CEO-median employee pay ratio disclosure, approximately three-quarters (74 percent) of corporate directors say they do not believe it is a meaningful or helpful measure for investors. Other concerns cited by smaller proportions of directors are internal and external reaction to perceived high ratios (10 percent), unfair comparisons to other companies (8 percent), difficulty in identifying median employee pay (5 percent) and the inability to fully exclude non-U.S. employees that inflate the ratio (3 percent).
Reflecting a possible unintended consequence of this new disclosure, a majority of Board members (58 percent) believe the CEO–median employee pay ratio could lead to companies outsourcing low-wage functions to third-party contractors.
Pay-for-Performance. Under the SEC’s proposed pay-for-performance disclosure rules, most public companies will need to report the compensation for their CEO and other senior executives during the past five years compared to the company’s total shareholder return (TSR) during that same timeframe. Yet half (51 percent) of corporate directors do not consider TSR to be an appropriate measure for company performance. When asked if they intend to change their company’s incentive plan measures to include TSR, a majority of Board members (52 percent) indicated they have no plans to add TSR as a measure. In contrast, close to one-third (31 percent) indicate TSR is already a measure in their business’s plans and an additional 7 percent of directors are planning to add TSR. A small minority (10 percent) claim their companies have no incentive plan measures.
Claw Backs. Close to three-quarters (72 percent) of Board members are in favor of the SEC’s proposed new rules requiring public companies to “claw back,” or recoup, top executives’ incentive pay if that pay was based upon financial statements later found to contain material errors. However, an even greater percentage (78 percent) of directors believe Boards should be able to use their own discretion on whether to pursue “claw backs” from an executive.
“We are clearly seeing a greater awareness and dialogue among directors with respect to both pending requirements and proposed new rules related to executive compensation,” said Jim Willis, a Senior Director in the Compensation and Benefits Consulting Practice of BDO USA. “While Board members are generally supportive of some regulations, such as the SEC’s proposed new rule requiring companies to claw back incentive pay when material reporting errors necessitate a financial restatement, directors question the value of others, such as the CEO – median employee pay ratio that will be published in SEC filings beginning in 2018.”
Cadillac Tax. The “Cadillac tax,” a provision of the 2010 Affordable Care Act that goes into effect in 2018, will place a 40 percent tax on health benefit costs paid by employers that exceed government-set thresholds of $10,200 for individuals and $27,500 for families. Forty percent of public company Board members believe their company will be impacted by the Cadillac tax and approximately two-thirds (65 percent) of those affected are planning on making changes to their health benefits to avoid the tax.
When asked about specific changes they were considering, strong majorities cite a shift to higher deductible plans so that employees pay more medical expenses out-of-pocket (95 percent), dropping high-cost plan options (86 percent), adopting wellness and preventative initiatives to drive down costs (83 percent) and reducing the overall level of benefits offered (78 percent).
Tax Extenders. For several years, Congress has waited until the final weeks of the year to vote on more than 50 “tax extenders,” such as the research and development credit, Section 179 expensing and bonus depreciation. Better than three-quarters (77 percent) of Board members believe the precarious nature of these credits (R&D, bonus depreciation, etc.), needing to be renewed each year, makes it difficult for their businesses to make long-term planning decisions and an identical proportion (77 percent) are in favor of making these credits permanent.
Consumption Tax. As an election year approaches, there is always some focus on the tax system and approximately half (49 percent) of corporate directors say they are in favor of replacing the corporate and personal income tax with a tax on consumption. Last year, just 40 percent were in favor of switching to a consumption tax. A consumption tax, which captures all segments of the economy, is viewed as less complex and much easier to administer than the income tax.
BDO USA’s Corporate Governance Practice is a valued business advisor to corporate Boards. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on a myriad of accounting, tax, risk management and forensic investigation issues.
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