The average change-in-control benefit provided to United States CEOs has increased 32 per cent over the past two years, rising to US$30.2 million in 2011 from US$22.9 million in 2009, according to a new study Alvarez & Marsal Taxand. The study, which analyzed current change-in-control arrangements among the top 200 publicly traded U.S. companies, revealed the increase was driven primarily by equity-based payouts and 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 upon 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.”
Similar to 2009, 78 per cent of CEOs and 80 pe rcent of other named executive officers are entitled to receive a cash severance payment upon termination in connection with a change in control. While cash severance payments for CEOs account for more than 25 per cent of average change-in-control benefits received, a majority (59.4 per cent) are long-term incentive benefits, such as restricted stock options, that are tied to performance.
Of the 200 companies reviewed, 99 per cent provide some type of change-in-control protection, of which the vast majority (96 per cent) had protection under equity plans. Agreements and retirement/deferred compensation plans trail behind at 64 per cent and 49 per cent, found the survey.
“We’ve seen an increase in reluctance from shareholders to pay out CEOs upon a change in control without termination of employment,” said Cumberland. “This has led to a significant increase in double-trigger vesting — meaning another event must occur in accompaniment with a change in control for equity to vest — with 53 per cent of companies in 2011 offering at least one plan that provides for double-trigger vesting, up from only 28 per cent in 2009. However, single-trigger vesting is still the primary practice to vest equity upon a change in control.”
Similarly, survey findings show companies are approaching excise tax protection with more caution. Only 49 per cent of CEOs have excise tax gross-up or modified gross-up protection, compared with 61 per cent in 2009 and 66 per cent in 2007. Of the companies that provide an excise tax gross-up, more than one-half (51 per cent) have indicated they intend to phase out or completely eliminate tax gross-up payments in the future.
The study also analyzed changes across different industry sectors. Findings include:
•The consumer discretionary industry has the largest average change in control benefit of US$46.1 million while the telecommunications industry has the lowest average benefit of US$15.9 million.
•Ninety-five per cent of companies in health care, materials and utilities industries provide a cash severance benefit, yet only 55 per cent of companies in the financial services and information technology industries do so.
•Eighty per cent of companies that provide excise tax gross-ups in the information technology industry have publicly disclosed their intention to phase out or eliminate excise tax gross-ups in the future, compared to only 29 per cent 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. 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.”
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