Despite sluggish economic growth, the average change-in-control benefit ("golden parachute") provided to CEOs at large U.S. companies increased 32 percent over a two-year period, rising to $30.2 million in 2011 from $22.9 million in 2009, according to the latest annual study by tax advisory firm Alvarez & Marsal Taxand.
The 2011 study analyzed change-in-control arrangements among the top 200 publicly traded U.S. companies, revealing that the increase was driven primarily by equity-based payouts tied to a company’s performance.
“Pressure from shareholder groups is continuing to drive more performance-based compensation—such as equity-based compensation—and fewer gross-up payments, which cover the full amount of any excise tax imposed on the executive in a change-in-control situation,” said Brian Cumberland, a managing director with Alvarez & Marsal Taxand and national practice leader of its compensation and benefits practice. “These findings demonstrate both a shift in what’s expected from senior management and a direct correlation between corporate performance and CEO rewards.”
Key findings from the 2011 study report, released in January 2012, include:
• Of the companies reviewed, 99 percent provided some type of change-in-control protection, of which the vast majority (96 percent) had protection under equity plans. Employment/severance agreements and retirement/deferred compensation plans trailed behind at 64 percent and 49 percent.
• Similar to 2009 and 2010, 78 percent of CEOs and 80 percent of other named executive officers (NEOs) were entitled to receive a cash severance payment on termination in connection with a change in control.
Cash severance payments accounted for more than 25 percent of average change-in-control benefits received, the study revealed. Still, the majority (59.4 percent) of change-in-control benefits received were long-term incentive benefits, such as restricted stock shares and restricted stock options that were tied to performance.
Double-Trigger Vesting Up
Of note, double-trigger vesting has increased—meaning that another event must occur with a change in control for equity to vest, usually involuntary termination of the executive or the executive's resignation for "good reason" within a certain period after the change in control ("good reason" usually includes a reduction in the executive’s duties, responsibilities, authority, title, compensation or benefits, or a relocation beyond a certain distance).
“We’ve seen an increase in reluctance from shareholders to pay out CEOs on a change in control without termination of employment,” said Cumberland.
The survey found that:
• 53 percent of companies in 2011 offered at least one plan that provided for double-trigger vesting, up from only 28 percent in 2009.
• However, single-trigger vesting remained the primary practice to vest equity on a change in control.
Executive Tax Gross-Ups Down
Additionally, companies are reducing gross-up payments, which cover the full amount of any excise tax imposed on the executive in a change-in-control situation:
• Only 49 percent of CEOs had excise tax gross-up or modified gross-up protection in 2011, compared with 61 percent in 2009 and 66 percent in 2007.
• Of the companies that provided an excise tax gross-up, about half (51 percent) indicated they intended to phase out or eliminate tax gross-up payments in the future.
Industry Sectors Vary
The study analyzed changes across different industry sectors and found that:
• The consumer discretionary industry had the largest average change-in-control benefit of $46.1 million, while the telecommunications industry has the lowest average benefit of $15.9 million.
• 95 percent of companies in the health care, materials and utilities industries provided a cash severance benefit, while only 55 percent of companies in the financial services and information technology industries did so.
• 80 percent of companies that provided excise tax gross-ups in the information technology industry had disclosed publicly their intention to phase out or eliminate excise tax gross-ups, compared to only 29 percent of financial services companies.
“As the business environment undergoes transformations to support greater transparency across corporate practices, we are bound to experience variations that sometimes may seem counterintuitive,” Cumberland noted. “In this economy, one would have expected parachute payments to decline, as did general wages. However, given that the majority of compensation is vested over the long term, fluctuating stock prices account for the increase. As we move into 2012, I believe we will see some fundamental changes to compensation norms, and with it, a renewed sense of accountability and transparency.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Game Plan: The Next Say-on-Pay Vote May Not Be as Easy to Win, SHRM Online Compensation Discipline, January 2012
Designing Executive Compensation Plans, SHRM Tools and Templates, December 2011
Corporate Directors Focusing on Executive Compensation, SHRM Online Compensation Discipline, December 2011
Diminishing Luster in 'Golden Parachutes' Reported, SHRM Online Compensation Discipline, February 2010
Executive Pay: Perception and Reality, HR Magazine, April 2009
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