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Diminishing Luster in 'Golden Parachutes' Reported
Scrutiny of executive compensation leads to 40% decrease in corporate 'change in control' benefits

By Stephen Miller  2/10/2010
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In the wake of mounting public scrutiny surrounding executive compensation, the value of  “golden parachutes” for chief executives and other senior officers at the 20 largest publicly traded U.S. companies decreased by approximately 40 percent over two years, according to an analysis by tax advisory firm Alvarez & Marsal Taxand (A&M).

The study, conducted by A&M's compensation and benefits practice, showed that the average value of "change in control" benefits provided to departing CEOs decreased to $22,987,661 in 2009 from $38,355,523 in 2007. Similarly, the average value provided to other nonexecutive officers fell to $7,975,671 in 2009 from $13,191,635 in 2007.

“Scrutiny surrounding executive change in control arrangements—which have historically remained under the radar—has increased dramatically as a result of new Securities and Exchange Commission (SEC) proxy compensation disclosure rules, the Troubled Asset Relief Program and the growing influence of shareholder activists groups,” says Brian Cumberland, managing director and head of A&M's compensation and benefits practice. “In this environment, it has become imperative for companies to carefully assess the arrangements they have in place, validate existing benefits and ensure they can stand behind their numbers.”

'Gross-Ups' and Severance Multiples Decline

Among the study’s other findings:

The number of executives entitled to gross-up payments, under which the company makes the executive “whole” on an after-tax basis by covering any imposed excise taxes, has declined. From 2007 to 2009, the percentage of CEOs receiving gross-ups dropped from 66 percent to 61 percent and the number of nonexecutive officers slid from 60 percent to 58 percent.

Severance multiples have declined. Compared with 2007, fewer executives in 2009 (52 percent of CEOs and 26 percent of other nonexecutive officers) were entitled to receive cash severance payments equal to three times their annual compensation. Notwithstanding this reduction, the actual qualified value of severance benefits dropped only slightly. This can be attributed to turnover and a greater use of base and bonus as the definition of compensation for the purpose of calculating severance payments.

Other Perks Remain

While there were some notable changes, other areas have remained relatively constant:

More than 80 percent of CEOs and other nonexecutive officers were still entitled to receive a cash severance payment on termination in connection with a change in control.

The percentage of companies providing at least one executive with an enhancement in retirement benefits remained at 59 percent.

86 percent of companies still use a single trigger to activate a change in control provision in equity plans (e.g., options, restricted stock, etc.), generally resulting in accelerated vesting.

A&M’s study analyzed large firms, based on market capitalization, in 10 industries. The analysis was based on information from each company’s 2009 SEC filings and disclosures, including information on employment agreements, as well as company policies, equity plans, annual bonus plans, retirement plans, deferred compensation plans and proxy disclosures, and it drew comparisons with the firm’s 2007 study.

Stephen Miller is an online editor/manager for SHRM.

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