Everything That Glitters May Now Be Gold

Fred WhittleseyPay and Performance: The Compensation Blog0 Comments

In the 1990’s and into the 2000’s, employee stock options glittered.  When the glitter faded due to market downturns and increasing volatility, new forms of equity compensation emerged to restore the sheen – option exchanges and repricing and restricted stock units.  This past week’s market volatility, economic uncertainty, and the contributing factors took away a bit of the remaining glitter.With widespread concern about equity investments, what has been the newest shining light?  Gold.  But we can, and in many cases must, compensate employees with equity and we can’t do that with gold…can we?

Beyond the surging price of gold in response to global economic, financial, debt, and currency issues, there are some trends underway not gaining the attention of mainstream media that point to a growing influence of gold as a currency.  Does this open an opportunity for considering gold as a form of employee compensation?

While this may appear to be a “fringe” idea, such a view would place the world’s most prominent countries, most sophisticated investors, and a dozen US states on this fringe.

This, of course, is all intended to stimulate discussion.

  • My accounting and valuation colleagues will point out the technical issues (with pay linked to a commodity)
  •  My tax colleagues will poke holes in the court cases and cite the Code
  •  My legal colleagues will undoubtedly identify all of the reasons that this is a poor idea and the possible liabilities resulting
  • My equity plan administration colleagues will curse me for recommending a non-equity form of compensation (can the software platform handle a ”restricted gold” award?)
  •  My survey and proxy data colleagues will wonder where gold would be categorized on a data input questionnaire and in the database.  A full value award?  Bonus? Other LTI?
  • And of course, my corporate governance colleagues will cite the horrendous outcome of decoupling compensation from shareholder value.

Not unlike issues we’ve faced with other “new” pay vehicles, like cash long-term incentive awards.

I’m providing a few links below that set the stage for what I believe will be a discussion over the next year that will move from what may appear to be a humorous alternative, perhaps even satirical, view to a central discussion point in employee compensation planning – designing, delivering, and measuring pay value if and when the bottom falls out of both the global economy and the US currency.

Some of these links are on sites that are clearly pro-gold, anti-US currency, and even a bit anti-government, but some are a bit more credible.   All are factually true.  Sources of these excerpts are available at the links.
Winning the Tax Case in 2007…

The essence of the argument is that under the Constitution Congress is obligated by law to mint and circulate such coins as demand requires, and must establish the value of coins as they are used as legal tender, but the coins’ market value, arising as valuable personal “property,” is a distinct, separate attribute of such coins, and is of no legal consequence if the coins are used as legal tender.

In other words, if a worker is paid with such coins, his taxable “income” (if any) can only be the face value indicated upon the coin money paid — i.e., $1.00 for a circulating silver dollar or $50 for a circulating gold U.S. coin. Not surprisingly, the IRS has never issued any public guidance regarding this significant issue.
But Losing the Tax Case in 2009…

(Defendant) faces up to 296 years in prison and fines of up to $14 million, Brower said. (Co-defendant) faces up to 71 years in prison and fines of up to $2.75 million.

Note:  The above cases were not just about the use of gold coins as compensation but had a number of counts of fraud and conspiracy related to hiding assets and other tax-avoidance actions.
The Technical Tax and Legal Points

The government called three accountants to testify. The defense asked each one, “What is the proper way to calculate income for purposes of the Internal Revenue Code if you are paid in a gold coin that has a $50 face value on it?” All three of them responded, “I do not know; I’ll have to research that.”  One of them had a masters degree in taxation.

No Federal Court of Appeals has ever ruled that the gold coins in question must be reported to the IRS based on FRN (Federal Reserve Note) market value.
Utah Legalizes Gold, Silver Coins as Current (22-May-2011)

Utah became the first state in the country this month to legalize gold and silver coins as currency. The law also will exempt the sale of the coins from state capital gains taxes.

Earlier this month, Minnesota took a step closer to joining Utah in making gold and silver legal tender. A Republican lawmaker there introduced a bill that sets up a special committee to explore the option. North Carolina, Idaho and at least nine other states also have similar bills drafted.
What Would Have Happened If…?

20-20 hindsight being what it is, I still find it interesting to do a what-if analysis.  For example, what if the typical Nasdaq company 12 months ago had granted gold instead of restricted stock units (RSUs) with a one year cliff vesting date? (based on Tuesday, 16-August-2011 closing prices) – with RSUs represented by the Nasdaq Composite Index and gold represented by the SPDR Gold Trust ETF (click on links to see price charts):

S&P 500 vs, Gold, 1-year

Nasdaq:  +15.66%
Gold:  +45.26%

What about a 5-year view?

S&P 500 vs. Gold, 5-year

Nasdaq:  +22.63%

Gold:  +177.341%

Hmmm.  7.8x. (The 10-year comparison is around 10x).
So What?

Will companies start using gold to pay employees?  Probably not.  Will some company somewhere do it?  Probably so.  We cannot discount the effects of political views of boards of directors, CEOs, and private company owners in the employee compensation decision process. And some people just love a new idea and being the first to try it.

Maybe a company will grant gold (or a gold derivative) as a confidence-builder when inflation returns and employees realize that meager salary increases, like current interest rates,  are really a negative number.

Or as an element of an employee choice program – bonus, stock options, or gold coins?

Or when the stock market crashes again, options go underwater, RSUs represent a fraction of their grant value, and yet another option exchange program loses its luster.

Or maybe a gold coin will replace the holiday bonus, with employers grossing-up for taxes.  Better that than a turkey, which is what the US dollar may turn out to be.

Zoellick Says China Currency To Be Global Player (14-August-2011)
World Bank president Robert Zoellick a gathering of the Asian Society in Sydney on Sunday that the renminbi and other Asian currencies may form a basket of currencies in the future that play the role as the international reserve and trade currency instead of the current US dollar-based global finance and trade system.

Just looking ahead.

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