Companies are changing their change in control (CIC) programs for executives. According to a survey by Mercer, the majority of participating companies (60 percent) made changes to their program in the last two years, and those changes are in response to shareholder concerns that the programs provide an expensive windfall to executives.
Change in control benefits - cash severance and stock awards paid to senior executives in connection with a corporate transaction - receive a great deal of scrutiny, but there has been limited information available. Mercer's Change in Control Survey 2007 ascertains emerging trends and market practices with regard to change in control severance programs on all eligible program participants - not just the top five executives reported in proxies. It includes responses from 182 US participants across 20 industries with median annual revenue of $3.3 billion.
Treatment of equity: A big move toward Double Trigger for equity vesting
Most equity awards, such as stock options, vest over time. Shareholders do not like to see companies accelerate vesting simply because of a corporate transaction - called Single Trigger - because it is seen as a windfall to employees, whether they retire with full vesting or obtain employment elsewhere.. But, until recently, the practice has been widespread. Shareholders want equity awards to accelerate only when the employee has also lost his or her job as a consequence of the corporate transaction, a so-called 'Double Trigger.'
"While we expected to see a growing move toward Double Trigger, we were surprised by its magnitude, said Diane Doubleday, global leader of Mercer's executive remuneration services. "Of companies that made recent changes to their programs, the prevalence of Double Triggers for equity vesting was particularly high - 64 percent.
Treatment of employees' excise tax liability: Golden Parachute tax provisions
Another prevalent practice that is being criticized is golden parachute tax gross-ups. The gross-up is intended to put the executive in the same after-tax position that he or she would have been absent the excise tax, which many perceive as inequitable. However, the cost to companies can be substantial and often far exceeds the net benefit delivered to the executive.
Of companies that made recent changes to their programs, 56 percent instituted a conditional gross-up for the top executives. These provisions cut back benefits in some cases where a gross-up would be triggered.
"The survey does not suggest that gross-ups will be disappearing any time soon, but we're starting to see a change in their structure, said Ms. Doubleday. "Companies that recently made changes to their programs reported a dramatic increase in the use of conditional gross-ups, which on their face seem a more responsible alternative because they may limit the company's obligation to provide a gross-up.
For more information about the study and to purchase it visit www.imercer.com and go to the US home page. The survey report includes information on eligibility, cash severance levels, treatment of equity and gross-up provisions for golden parachute taxes, plus reports on the types of changes that companies have recently made to their programs.
