GAMCO INVESTORS, INC. ET AL

Total compensation costs, which are largely variable in nature, increased $39.7 million, or 47.4%, to $123.5 million in 2019 from $83.8 million in 2018. Variable compensation costs, which are tied to revenues and principally consist of portfolio manager and relationship manager fees, increased $34.3 million to $83.1 million in 2019 from $48.8 million in 2018 and increased as a percent of revenues to 26.6% in 2019 from 14.3% in 2018. The decrease of waived compensation by the CEO to $23.0 million in 2019, as compared to $46.6 million in 2018, was the main driver of the increased variable compensation costs. During 2019, the CEO elected to irrevocably waive all of his compensation for a total of six months (January 1, 2019 to March 31, 2019 and September 1, 2019 to November 30, 2019) as compared to ten months in 2018 (March 1, 2018 to December 31, 2018). Additionally, the accounting for the vesting of the deferred cash compensation agreements (“DCCAs”) increased 2019 compensation by $14.8 million, consisting of $17.0 million from expensing the original DCCA values less a $2.2 million reduction for the DCCA indexing to the GBL stock price. 2018 compensation was reduced by $3.6 million consisting of a $32.0 million reduction for the DCCA indexing to the GBL stock price less $28.4 million from expensing the original DCCA values. Fixed compensation costs increased to $37.6 million in 2019 from $33.4 million in 2018. Stock based compensation was $2.8 million in 2019, an increase of $1.2 million, as compared to $1.6 million in 2018.

Notwithstanding its ability to settle these agreements in stock, GAMCO made a cash payment to the CEO on each respective vesting date. While the agreements did not change the original calculation of the CEO’s compensation, our reporting under U.S. GAAP for his compensation did change due to the ratable vesting and the indexing to the GBL stock price. The original value of the DCCAs was based on the compensation earned in the period divided by the volume weighted average price (“VWAP”) of the GBL stock price for the period (“Original VWAP”) to calculate the number of restricted stock units (“RSUs”) granted. Upon vesting, each DCCA was paid out based on the lesser of the VWAP of GBL’s stock price on the vesting date (“Vesting Date VWAP”) and the Original VWAP multiplied by the number of RSUs. The table below shows a summary of the DCCAs (in millions, except RSUs and VWAPs):

In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In the first six months of 2017, the ratable vesting continued for the 2016 compensation, and the new First Half 2017 DCCA grant resulted in compensation for the first six months of 2017 being deferred and expense being recorded for 33% vesting in that period. The CEO’s third quarter 2017 compensation was not deferred so 100% of the CEO’s compensation for that period was recorded together with the ratable portions of the vesting of the 2016 DCCA and the First Half 2017 DCCA. This resulted in a compounding effect in periods when non-deferred current period compensation was incurred and prior period deferred compensation was ratably vested. On May 23, 2018, the CEO waived receipt of $6 million of the First Half 2017 DCCA and a reduction in expense was recognized in 2018. On July 2, 2018, the First Half 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO. This payment was after the waiver of $6.0 million by the CEO and a reduction of $2.6 million resulting from the DCCA RSUs being indexed to GBL’s stock price and utilizing the lesser of the Vesting Date VWAP ($27.1837) versus the Original VWAP over the first half of 2017 ($29.6596). On April 1, 2019, the Fourth Quarter 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $11.0 million was made to the CEO. This payment was reduced by $4.5 million resulting from the DCCA RSUs being indexed to GBL’s stock price and utilizing the lesser of the Vesting Date VWAP ($20.7916) versus the Original VWAP over the fourth quarter of 2017 ($29.1875). Subsequent to December 31, 2019, on January 2, 2020, the 2016 DCCA vested in accordance with the terms of the agreement and a cash payment of $43.7 million was made to the CEO. This payment was reduced by $32.3 million resulting from the DCCA RSUs being indexed to GBL’s stock price and utilizing the lesser of the Vesting Date VWAP ($18.8812) versus the Original VWAP over 2016 ($32.8187).

Management determines the appropriate classification of securities at the time of purchase. Government debt with maturities of greater than three months at the time of purchase are considered investments in debt securities. Investments in debt securities are accounted for as either trading, available for sale (“AFS”), or held-to-maturity. The Company does not hold any investments in debt securities accounted for as trading or AFS. The Company’s investments in debt securities are classified as held-to-maturity, as the Company has the intent and ability to hold these securities until maturity, and represent fixed income securities recorded at amortized cost. Discounts from and premiums to par value on held-to-maturity investments are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any. Held-to-maturity securities are evaluated for other than temporary impairment each reporting period and any impairment charges are recorded in gain/(loss) from investments, net on the consolidated statements of income. As of December 31, 2019 and 2018, there were no impairments on the Company’s investments in debt securities classified as held-to-maturity.

GBL and its operating subsidiaries file a consolidated federal income tax return. Accordingly, the income tax provision represents the aggregate of the amounts provided for all companies. The Company operates in numerous states and countries through its subsidiaries and therefore must allocate income, expenses, and earnings to these taxing jurisdictions taking into account the various laws and regulations in each jurisdiction. Each year, the Company files tax returns in each jurisdiction and settles its tax liabilities, which may be subject to audit by the taxing authorities. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts on the consolidated statements of financial condition using the statutory tax rates in effect for the year when the reported amount of the asset or liability is recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. In accordance with Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, excess tax benefits or tax deficiencies are recognized against income tax expenses. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. In accordance with Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC 740”), for each tax position taken or expected to be taken in a tax return, the Company determines whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize on the consolidated statements of financial condition. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company records unrecognized tax benefits as liabilities in accordance with ASC 740 and adjusts these liabilities when the Company’s judgment changes as a result of the evaluation of new information not previously available. The Company recognizes the accrual of interest on uncertain tax positions and penalties in income tax provision on the consolidated statements of income.