Medtronic Had No Choice But to Cover Excise Tax for Top Executives?

Lee Schafer argues in his Star Tribune column today that Medtronic had no choice when it decided to cover the millions dollars — perhaps $63 million — in taxes that would result for these executives as a result of the purchase of Irish-based Covidien.  He tells us that this “isn’t a special deal for top execs” seemingly because their “after-tax pay won’t change nickle.”

Now I don’t know much about the accounting and laws that affect these decisions, but I find it somewhat disingenuous and misleading to say that the executives don’t benefit.

Medtronic-LogoFirst of all, put the tax aside for a moment, the executives own shares in the company as stock-based compensation.  The stock is awarded as a part of Medtronic’s “‘philosophy of compensation philosophy of ensuring that executive officers hold long-term, performance based compensation'” as Shafer quotes a Medtronic filing letter.

One presumes that Medtronic is making the Covidien deal because it will be good for Medtronic and thus raise the value of that company.  Correct?  So while the executives might not gain a “single nickle” from Medtronic’s decision to cover the top execs’ capital gains tax, they would realize gains if the deal does in fact add value to Medtronic.  Right?

Let’s look at this another way.  If executives and directors are rewarded for their unique skill and talent — talent worth millions and millions of dollars apparently — what kind of risk do they take when the costs (the tax) of their decisions are covered by the company?  That’s kind of like gambling with the house bank, isn’t it?

And what about the non-top executive shareholders who don’t get this benefit?

Sure, Medtronic’s execs are not benefiting by splitting up $63 million and adding that to their income today,  but they are benefiting from avoiding a cost.  Isn’t that more or less the same thing?  (Yes.  It is.)

Finally, I don’t know Medtronic’s labor positions, but we constantly hear American corporations defending sluggish hiring and wages policies because they have to watch labor costs.  Here we see Medtronic coming up with $63 million — something Schafer calls “just another deal cost, to be noted on a spreadsheet and then paid” — for what is essentially a compensation (i.e., “labor”) cost.

The bottom line is Medtronic — and the executives who arranged the deal that included their own special protection — did indeed have a choice.  Moreover, the people benefiting from this choice expect to gain from the deal otherwise they wouldn’t pursue the deal, correct?  So why shouldn’t they be accountable for their wisdom and boldness?

Shafer’s apology reeks of double-speak.  A deal is a deal and you don’t have to be a fortunate business executive to understand that.

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