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"Top Earning CEO Gabelli Waives Pay to Cover Company Debts"

GAMCO Investors chairman and CEO Mario Gabelli has decided to forgo his pay from March until the end of the year to help the company pay off outstanding debt, take advantage of the new corporate tax rate and boost shareholder value.

"The new tax rules allow the company to get a 21% tax rate versus 35%, so it is better to keep the money in the company and then pay down debt," Gabelli says. "It is a win-win-win for shareholders when you reduce my compensation by the amount that I make."

Gabelli's annual compensation reached $75.9 million in 2016, following annual pay packages of $75 million and $88.5 million in 2015 and 2014, according to the firm's 2016 proxy statement.

"I have a contract that says I am supposed to get it," Gabelli says. "I looked at myself and came to the decision that it was the right thing to do for the shareholders."

GAMCO is a wholly-owned subsidiary of GBL, a holding company incorporated in April 1998, in advance of its initial public offering in April 1999.

GGCP Holdings, LLC, a subsidiary of GGCP, Inc., which is majority-owned by Gabelli, owns a majority of the outstanding shares of Class B Stock of GBL, which represented approximately 91% of the combined voting power of the outstanding common stock and approximately 63% of the equity interest on December 31, 2017, according to its latest annual report.

GAMCO Investors' stock had declined from $48.47 on Dec. 26 2014 to $26.12 on Feb. 16, 2018, a week ahead of the announcement that Gabelli would forgo his pay for the reminder of the year.

For Gabelli, foregoing his pay to improve the firm's cash position is another way to boost its value.

"Even if [the pay waiver] does not continue in 2019, it goes to show the world that... if you add back certain non-recurring costs, or synergies you can get as a seller... what the underlying intrinsic value [is]," Gabelli says. "That is what the company is really worth. That was another hidden plus of this which I will write about in my annual report."

Waiving Gabelli's compensation can boost the company's cash position and ultimately its value, but it can also benefit the firm's CEO personally.

Those benefits can be achieved, potentially, in two ways, says Steven Goldburd, a tax partner at New York City based tax law firm Goldburd McCone, who has not analyzed the company's history and financials.

"If he doesn't take the paychecks, and because the debt is lowered and the stock price rises, he may end up getting more from the stock price than he would on his payroll," Goldburd says. "That is a very, very good possibility."

"If he is personally signed and is personally liable for any of this debt, [the IRS] could come and collect from him personally later on, which would mean, if he pays it from the company, because the company is not paying him, he doesn't have to pay tax on the income that he would otherwise receive as payroll."

The firm's current debt stood at $89 million as of December 2017, says Kieran Caterina, senior v.p. and co-chief accounting officer at GAMCO. The debt includes $24 million in senior notes, $15 million in short-term notes and a $50 million note owed to Associated Capital, the firm's alternatives manager and institutional research arm, which became an independent, publicly traded company controlled by Mario Gabelli in November 2015.

At the time of the spinoff, GAMCO owed Associated Capital $250 million. Its current $50 million debt to Associated Capital is due on Nov. 30, 2020, but the firm doesn't not want to wait until then to pay it off.

"The rationale [behind the CEO's compensation waiver] was it provides the company with greater financial flexibility, in particular as... we are looking to pay down the debt that we have outstanding more quickly," Caterina says.

The firm has not projected how much it would have paid Gabelli for the period he has decided to forgo compensation, according to a Feb. 23 announcement that refers to its 2017 proxy, which has not yet been released, for Gabelli's full year variable compensation.

GAMCO is fighting a sales executive who has accused the firm of "clawing back" more than $160,000 in earnings as well as withholding sales commissions, seeking to have the case arbitrated by the Financial Industry Regulatory Authority (Finra), FundFire sister publication Ignites reported last week.

In 2016, Gabelli was the highest paid CEO among publicly traded asset management companies, Ignites reported in April 2017. Nearly $60 million of his pay package was associated with his management of various portfolios. The firm's assets under management reached $43.1 billion at the end of 2017, according to its latest annual report.

As he commands the highest CEO pay in the industry, Gabelli "epitomizes the firm's strengths as well as its weaknesses," Morningstar analyst Christopher Franz writes in a June 14, 2017 analyst research note.

"The firm boasts generally long-tenured managers and a clear, disciplined approach to equity investing thanks to Gabelli's leadership, which has resulted in some strong performers, like Gabelli Small Cap Growth GABSX. Nonetheless, mediocre performance characterizes most of the sprawling fund lineup, and lofty fees provide little reassurance of that changing much. Gabelli, 75, deserves ample blame, as he sits on most of GAMCO's fund boards and controls the majority of its shares' combined voting power."

Succession is another concern at GAMCO, Franz adds. Even though the firm named co-CIOs for value strategies in August 2015, Gabelli has not laid out retirement plans and remains listed as manager on 22 open- and closed-end funds, 10 in a solo capacity, according to the report.

Gabelli has deferred his compensation in the past. On Dec. 23, 2016, he entered into an agreement with the company under which any variable compensation earned by him during the first half of 2017 would be awarded in the form of restricted stock units, which implied no cash compensation for that period, according to the firm's 2016 annual report.

"I reallocated money that was due to me to other teammates and that is pretty much an ongoing dynamic," he says. "I probably have taken compensation... and allocated to other individuals as much as $10 million a year for the last three or four years."

Article published on March 19, 2018
By Fundfire

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