News & Publications

Michelle Capezza Quoted in “Getting It Right: The Challenges of Executive Compensation”

Financier Worldwide January 2020

Michelle Capezza, Member of the Firm in the Employee Benefits and Health Care & Life Sciences practices, in the firm’s New York office, was quoted in Financier Worldwide, in “Getting It Right: The Challenges of Executive Compensation,” by Richard Summerfield.

Following is an excerpt:

Executive compensation is a complex and deeply emotive subject. In the current regulatory climate, the salaries, bonuses and incentive packages offered to the C-suites of publicly traded companies are subject to heavy scrutiny and can be difficult to understand, particularly for the public, which can often lead to anger and mistrust. …

‘Inflated’ executive pay has fuelled the conversation on income inequality and its implications for pay structures throughout the economy. “With the US facing a presidential election in 2020, further scrutiny will enter the debate based on recent campaign proposals for increased taxation of corporations paying executives beyond certain thresholds as compared to the mean for their employees, or requirements that employees elect a percentage of board members,” explains Michelle Capezza, a partner at Epstein Becker Green. “It will be important to analyse these issues more broadly, however, as the nature of work and expectations for workers is changing and the appropriate way to compensate individuals will need to be redesigned on all levels.” …

Another challenge in the current marketplace is that new types of jobs and career paths are emerging in many fields as the workplace transforms. Changing industries and job roles can further complicate negotiations. “There is a need for more individuals with new levels of technological and soft skills than can meet the demand for the ‘future of work’ and those that have the requisite combination of skills will be aggressively sought after,” says Ms Capezza. “Yet, many organisations are constrained by how they may compensate and incentivise their executives due to applicable laws and regulations, shareholders, as well as public opinion. Trying to design the right mix of compensation and benefits that is competitive for the future workplace, and compliant with applicable requirements, will become more challenging, but it will be imperative.” …

Companies should also evaluate their competition. Benchmark analysis can reveal what is considered a competitive mix of compensation, including base pay, incentives and additional employer-provided benefit programmes for a role in a specific industry. “For newer types of positions created in the future workplace, employers may find themselves setting the precedent as to what will be regarded as the benchmark compensation package,” says Ms Capezza. “It will also be necessary to determine new types of metrics to analyse pay for performance with evolving types of jobs, as well as to ensure that pay equity is addressed as is currently also being mandated under state and local laws. Once a competitive threshold is defined, companies must then analyse how to design the components in compliance with applicable laws and requirements, including any required caps on pay, clawback policies, confirmation that incentive programmes do not encourage inappropriate risk taking, other securities and tax law considerations, accounting, governance and approval procedures. It becomes an exercise in identifying the ideal, most competitive package for a designated role and then designing it to comply with applicable requirements and demands for review and approval,” she adds. …

There have also been important legal developments in the US since the early 2000s. The Sarbanes-Oxley Act, tax rules under Section 409A of the Internal Revenue Code for the deferral of compensation in nonqualified programmes, the Dodd-Frank Act, and, more recently, the Tax Cuts and Jobs Act of 2017 which, among other things, prohibits public companies from taking a tax deduction for executive compensation of covered executives in excess of $1m and removes the performance-based compensation exception to the deduction limit that existed under Section 162(m) of the tax code, have all had an impact. According to Ms Capezza, “these developments, along with shareholder demands, greatly impact the scrutiny over the fairness and design of executive compensation packages as well as the flexibility historically enjoyed. The debate continues, however, regarding how to appropriately compensate executives who must lead complex organisations, drive innovation and deliver profitability and value to shareholders while being subject to increased compensation oversight and limitations. This challenge will only increase as the nature of work evolves and those holding the highest positions will command robust compensation to the fullest extent permitted by the laws.”