One of the most popular executive perks during mergers and acquisitions is the so-called tax gross-up, which is a payment made by company's to cover taxes on an executive's severence package. Given today's tax law, these gross-ups can end up costing shareholders almost as much as the severence packages themselves! For example, when SBC boughtout rival AT&T in 2005, CEO David Dorseman received not only a $29 million severence package but an additional $11 million gross-up to cover taxes. These gross-ups often go under the radar, unnoticed by the majority of shareholders. Many shareholder rights groups call these gross-ups the most costly part of a golden parachute and an extremely inefficient use of shareholder money. Consequently, it will likely be a popular topic during this years proxy season.

Gross-ups first gained their popularity during the 1980's merger frenzy after the government imposed new tax penalties on executives aimed at preventing them from cashing out million by quickly selling their companies and unloading all of their shares. Companies then began offering gross-ups as an incentive to help keep and retain executives. According to an article on BusinessWeek, only 10% of companies in 1987 had gross-ups compared to about 77% now. It is becoming increasingly apparent that government regulations intended to help reduce executive compensation are simply costs that are passed on to shareholders...