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December 14, 2012
Election results may mean compensation changes

Another year has come and gone, and even more significant to many in the benefits and compensation community, another election has been decided. No matter which side of the aisle you’re watching from, you likely have opinions about what the next 4 years will bring. We spoke with a couple of experts, asking them what they see as they peer into the future of compensation.

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Gregg Passin is the executive compensation practice leader at Mercer, and his 22 years as a compensation consultant have given him a broad perspective on the field. “Not a whole lot is changing in compensation, as compared with health care and benefits, where there will be much more profound changes,” he says.

Prepaying 2012 bonuses

Tax rates remain the most controversial topic related to compensation, Passin says, referring to one aspect of the fiscal cliff: the expiration of the Bush-era tax cuts for high earners. “It remains to be seen whether the tax cuts for high earners will be allowed to expire, but at least it is on the president’s agenda. It affects people earning $250,000 for a couple, and that does affect most executives. So that means that in 2013 there will be higher tax rates.”

With that in mind, some companies are considering paying out 2012 bonuses a little early. “I can’t say that there is a big groundswell toward doing that, but certainly companies have been looking at it,” Passin reports.

While prepaying bonuses may be tempting, it isn’t as simple as it appears on the surface. Passin continues, “There are some technical issues that could make it difficult for companies to do that. Usually bonuses are based on calendar year results, and it is unlikely that companies will have the full results from 2012, so they can’t say what the bonus is going to be.”

There is another, perhaps more troublesome issue associated with prepaying bonuses in order to minimize taxes for executives: public and shareholder perceptions. “There are optics issues,” Passin says. “Do you, as a company, want to make this change that is, frankly, just for the benefit of the high earners, when there is really no business reason to do it? And when, in fact, there may actually be business reasons against it?

“Prepaying the bonus is not really a disclosable issue, but it will come out. Do you really want to be on the possibly negative receiving end of that when, again, there is no good business reason to do it? It serves the interests of your executives, but it doesn’t serve the company at all.”

Stephanie R. Thomas, Ph.D. of Thomas Econometrics (www.thomasecon.com) also has some opinions about the future of compensation in the second Obama term. She says that she’s watching five areas in her field of expertise, among which are compensation and employment issues. “First is the Paycheck Fairness Act,” she says.

Although the debate about gender pay equity has gone on for some time, Thomas expects to hear more about it during 2013. “The legislation has significant support, and I think it is likely that it will be reintroduced into Congress next year, possibly in April, to coincide with Equal Pay Day.”

Classification errors and the budget deficit

The federal budget continues to leak money, and that means a huge national debt. “Staggering,” is the word Thomas uses. She says that the government views wage and hour mistakes as a ready source of revenue, one that will continue to be emphasized in an effort to at least partially plug the whole in the budget bucket.

“Errors like independent contractor misclassification, exempt/nonexempt classification and others are easy revenue sources for the IRSand penalty income for the Wage and Hour division,” she says. Thus, employers should be particularly diligent about classifications, thereby avoiding unnecessary penalties and taxes – unless their desire is to help fill the budget hole.

Passin says that the biggest compensation issues of the last several years have been connected with the Dodd-Frank legislation. “Most of the provisions have already been implemented, so most companies have already adapted. Say on pay was the biggest one, and the others are pretty noncontroversial: antihedging disclosures, clawback policies – these are things that companies already started in advance of the Securities and Exchange Commission releasing the final regulations on them.

Many have adopted them already or are ready to pull the trigger as soon as the SEC comes out with those final regs. They are noncontroversial, really just good corporate governance practices. As far as the pay for performance disclosure in the proxy statement, it is also not controversial, but we don’t know what the SEC is going to recommend. All of us in the compensation community have been speculating about that, and we’ve talked with clients about what it might look like. But if we all put down on paper what we think it’s going to be, we probably overlap by about 60% or 70%.”

Internal pay ratio more complex than it seems

But there is one controversial element remaining to be implemented, says Passin. The internal pay ratio, or the ratio comparing the CEO’s pay with that of the average Joe Employee, is another item that seems simple on the surface, but really is anything but. “The internal pay ratio requires companies to disclose the ratio between the CEO’s total compensation, as disclosed in the summary compensation table in the proxy, to the same compensation of the median employee. It sounds simple, but it’s actually incredibly complicated.

“First of all, you have to determine the median employee – not average, but median. If it was average, you could just add up everything you pay and divide by the number of employees you have. But median means you have to find the mid-point of one person who is at the median, which is very different.” For those of you who haven’t wrestled with this concept in awhile, exactly 50% of people in a group earn more than the median, and 50% earn less.

“Most companies don’t have the HRIS systems that will allow them to do this,” Passin explains. “They might have different systems in different parts of the country or different business units, subsidiaries, etc. There are lots of questions that just haven’t been answered about this. For example, are part-time employees included? What about interns? Are the people in your cafeteria and your maintenance people included? What if you’re a global company, and what you pay in the US and in the UK compared to what you pay in Pakistan are so completely different?

“Companies want to comply, but for those that have even started thinking about it, frankly, most have just thrown up their hands because there is no way to get their arms around it. The House committee last year or the year before voted to rescind it, but it never went further than that subcommittee, and we think it’s unlikely that it’s going to get changed in Congress. In the scheme of things, it’s not the biggest thing in the world, and it’s not going to significantly affect how executive compensation is done in the US. But it is going to be a big burden on companies.”

It remains to be seen whether the next 4 years will bring changes to the way you do your job and the way you pay your employees. Either way, be sure to watch for developments, like our experts do. Thomas believes change may be ahead. “I think there’s the potential for more significant change in the employment law and regulatory climate,” she says.

You’ve been warned.

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