Some Executive Rewards Decline; Other Perks Hold Steady

By Stephen Miller, CEBS Mar 16, 2016
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As shareholders and advisory groups continue to scrutinize executive compensation, the number of executives entitled to tax gross-ups and other financial rewards triggered by a change in control of management is declining. But many popular executive perquisites—or perks—remain an important part of executives’ overall compensation packages, recent analyses show.

For its 2016 Change in Control Report, professional services firm Alvarez & Marsal examined arrangements among the top 200 publicly traded companies in the U.S. While the average value of change-in-control severance arrangements for CEOs has remained relatively flat—from roughly $29.9 million in 2013 to $30.3 million in 2015—the study showed changes in equity plans, cash severance multiples and excise tax gross-up payments.

“There are strategic reasons for management and compensation committees to provide executives with parachute payments. Nevertheless, change-in-control arrangements continue to face increased scrutiny,” said Brian Cumberland, managing director with the firm’s Dallas office, where he leads the compensation and benefits practice. “By benchmarking and evaluating these arrangements, boards and their compensation committees can demonstrate accountability and show that they are acting within the spirit of the [Securities and Exchange Commission’s] regulations and guidance.”

A major trend impacting change-in-control arrangements is the move toward performance-based long-term incentives that comprise a large portion of the change-in-control benefits to which CEOs and other named executive officers (NEOs)—whose compensation must be listed in company proxy statements—are entitled. The study found approximately half of the long-term incentives are subject to time-based vesting, as the other half are subject to performance-based vesting.

Among other notable findings:

  • Decline in tax gross-up payments. The number of executives entitled to excise tax gross-up payments—provided by a company to make an executive “whole” by covering tax liability related to change-in-control payments—continues to drop, with 17 percent of CEOs and 21 percent of other NEOs entitled to receive gross-up payments. Compared to 2013, this was a reduction from 30 percent for both CEOs and other NEOs. Moreover, 93 percent of companies that currently provide a tax gross-up or modified gross-up payment have indicated that they intend to phase out or eliminate gross-up payments in the future.
  • Decrease in severance multiples. The most common cash severance multiple for CEOs is between two and three times compensation (46 percent of firms). The prevalence of a three times or higher multiple has fallen to 37 percent in 2015, from 42 percent in 2013.
  • Conditions on cash severance payment. Similar to 2013, 78 percent of CEOs and 77 percent of other NEOs were entitled to receive a cash severance payment on termination in connection with a change in control. However, on a termination not in connection with a change in control, only 55 percent of CEOs and other NEOs were entitled to a cash severance payment.

But the study also revealed that 82 percent of companies in 2015 have unvested equity awards with a “double trigger”—either change in control or termination of employment—up from 63 percent in 2013 and 53 percent in 2011.

Lifestyle and Security Perks Hold Steady

In a separate look at CEO rewards, a study by consultancy Willis Towers Watson focused on lifestyle and personal security perks provided to U.S. CEOs at Standard & Poor’s 500 index firms. An Update on Executive Perquisite Trends in the S&P 500 found that the majority of companies still value these offerings as an important benefit for their CEOs in a competitive market. Only 4 percent of S&P 500 companies reported eliminating at least one perk in the most recent year, with no single type of perk eliminated most often.

“Given the relative stability of perquisites, it appears that most companies have reached the point of retaining only those perquisites perceived as essential to enhancing the performance of CEOs in their day-to-day tasks,” said Minha Ahmed, a consultant in Willis Towers Watson’s executive compensation resources unit in Arlington, Va.

“In the past decade, new rules requiring enhanced disclosure of perks have brought added scrutiny of these benefits, while the say-on-pay era has provided an avenue for investors to voice their concerns about perks they view as excessive,” Ahmed noted. “As a result, perk programs have largely evolved into arrangements designed to maximize the efficiency and work/life balance of the executive team, while providing risk mitigation for the company and its investors by providing executives with added security.”

Since the consultancy changed the universe of companies reviewed in its annual study from the Fortune 500 to the S&P 500, this year’s report did not include historical comparisons.

Perks for S&P 500 CEOS

Perquisite

Firms

Personal use of corporate aircraft

43%

Financial/tax planning

38%

Company car/car allowance

33%

Executive physical

30%

Supplemental life insurance

22%

Home security

18%

Spousal travel

14%

Club dues

12%

Supplemental disability insurance

11%

Matching gifts/charity

10%

Source: Willis Towers Watson


Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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