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March 06, 2014

Investors Eye Change-in-Control Agreements

The biggest U.S. companies are shifting away from gross-up provisions, which were once-common payments

NEW YORK—March 6, 2014—Major institutional shareholders are driving key revisions to the design of severance payouts to key executives in the event of a merger or takeover, according to findings based upon proxy research reported in a recent Webcast from executive compensation consultancy Pearl Meyer & Partners (PM&P).

“In today’s performance-focused environment, companies face investor pressure to address change-in-control payouts to departing executives that are considered excessive and/or too easily triggered,” said Daniel M. Wetzel, Managing Director and head of PM&P’s Los Angeles office, who spoke on the February 12 program Ultramodern Golden Parachutes: Change-in-Control Pay in 2013/2014.

The trend is exemplified by a shift among the biggest U.S. companies’ away from gross-up provisions, which were once-common payments made to reimburse senior executives for excise taxes imposed on certain awards made upon a change-in-control (CIC). Among the Fortune 50 companies,* the prevalence of gross-ups declined from 41% to 14% between 2006 and the end of 2012, according to an ongoing PM&P analysis of golden parachute disclosures and Say on Golden Parachute votes since 2011. 

“Such arrangements are clearly headed for extinction,” said Margaret H. Black, a PM&P Managing Director who also spoke on the program. “Five of the seven remaining Top 50 companies that still use gross-ups have announced their discontinuation.”

Other findings from Pearl Meyer & Partners’ proxy research discussed during the webcast include: 

  • More than 80% of the Top 50 companies had CIC provisions for top executives at the end of 2012, with over 70% of their estimated value related to accelerated payout of either equity or long-term incentive plan (LTIP) awards.
  • Since mandatory proxy disclosure of CIC and Golden Parachute payments under Dodd-Frank took effect in 2011, 98% of companies completing a transaction reported awards to their named executive officers.
  • While most accelerated equity vesting arrangements reported by the Top 50 companies were double-trigger (i.e., requiring both a CIC and termination for payout), single-trigger vesting was more common in the actual transactions.
  • More than half of companies reported modifying their CIC agreements for business reasons shortly before their transactions closed.  Changes included establishing retention or transaction bonuses, restructuring severance, or providing additional equity to executives.

* The top 50 public companies as reported in the 2013 Fortune 500.


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