Equilar Study: Change-in-Control Cash Severance Analysis Findings from a study of change-in-control payments at Fortune 100 companies

Transcription

1 Equilar Study: Change-in-Cntrl Cash Severance Analysis Findings frm a study f change-in-cntrl payments at Frtune 100 cmpanies Intrductin Change-in-cntrl arrangements have tw key functins: attracting new management talent t a cmpany and mtivating existing executives t cntinue wrking in sharehlders interests if leadership changes hands. By prviding payments upn a change in cntrl, these arrangements seek t relieve executives ptential anxieties abut lsing their psitin in the event f a merger r acquisitin. Change-in-cntrl severance packages have played a prminent rle in the natinal cnversatin abut executive cmpensatin. Sharehlder advisry grups are aiming t curb the use f glden parachute payments, delineating specific severance arrangements that culd be cnsidered excessive payments r prblematic pay practices. Targeted change-in-cntrl agreement features included cash multipliers f three times r greater, single- and mdified-trigger prvisins, and certain bnus definitins used t calculate the change-in-cntrl cash payment. In this study, Equilar examines change-in-cntrl arrangements amng Frtune 100 cmpanies fr fiscal years 2008 and This reprt sheds sme light n recent trends in crprate-gvernance refrm, which have been blstered by increased public scrutiny f executive cmpensatin. While the prevalence f change-in-cntrl arrangements has nt declined, firms are decreasing payments and instituting restrictive payment triggers related t executive terminatin. The analysis includes infrmatin frm crprate prxy statements, examining the fllwing tpics within change-in-cntrl arrangements: Change-in-CEO multipliers frm 2008 t multipliers fr CEOs and ther NEOs Change-in-cntrl cash payment triggers Definitin f salary and bnus multipliers Key Findings Change-in-Cntrl Cash Multiples Decrease fr CEOs: The prevalence f 3x salary multipliers amng Frtune 100 CEOs decreased frm 65.9% in 2008 t 44.2% in 2010, while the prevalence f 2x salary multipliers rse frm 18.2% t 34.9%. Similarly, the prevalence f 3x bnus multipliers decreased frm 65.9% in 2008 t 44.2% in 2010, while that f 2x bnus multipliers rse frm 15.9% t 32.6%. Over 40% f Frtune 100 Executives Receive Cash Payments upn a Change-in-Cntrl Terminatin: In 2010, 45.3% f CEOs included in the study had cash change-in-cntrl payment arrangements in place, while 41.2% f ther NEOs had such agreements. Mst Cmmn Multiplier Higher fr CEOs Cmpared t Other NEOs: The mst prevalent salary and bnus multiplier was 3x fr CEOs and 2x fr ther NEOs. Majrity f Change-in-Cntrl Payments Require Duble-Trigger Terminatin Scenari: 97.7% f cmpanies with cash payments upn a terminatin related t a change-incntrl required a duble trigger, while the remaining 2.3% required a mdified trigger. Target Bnus is the Mst Prevalent Bnus Definitin Used in F100 Severance Frmulas: 50.8% f all change-in-cntrl cash payments used target shrt-term incentives t calculate the bnus prtin f the severance amunt Equilar, Inc. All Rights Reserved. 1

2 Reprt Scpe and Methdlgy The infrmatin presented in Equilar s 2011 Change-in-Cntrl Cash Severance Analysis is derived primarily frm data disclsed in SEC filings fr Frtune 100 cmpanies frm fiscal years 2008 and T help put this analysis in cntext, the fllwing charts summarize key financial trends fr the Frtune 100 index in 2008 and 2010: Market Capitalizatin In 2010, publicly traded Frtune 100 cmpanies had a median fiscal year-end market capitalizatin f apprximately $40.8 billin. This represents a 54.5% increase frm the 2008 median value f apprximately $26.4 billin. $60.0 $40.0 $20.0 Median Market Capitalizatin ($BB) $26.4 $40.8 $ Annual Revenues $60.0 Median Annual Revenue ($BB) The median annual revenues fr Frtune 100 cmpanies increased by 9.8% frm 2008 t In 2010, Frtune 100 cmpanies earned median annual revenues f apprximately $49.4 billin. $40.0 $20.0 $45.0 $49.4 $ Net Incme In 2010, Frtune 100 cmpanies earned median annual revenues f apprximately $2.6 billin. The median net incme fr Frtune 100 cmpanies increased by 18.2% frm 2008 t $4.0 $3.0 $2.0 Median Net Incme ($BB) $1.0 $2.2 $2.6 $ Equilar, Inc. All Rights Reserved. 2

3 Definitins Change-in-Cntrl: A change in cntrl ccurs when a cmpany is acquired by anther entity r when a threshld percentage f a cmpany s shares are acquired by ne persn r grup. Fr the purpses f change-in-cntrl arrangements with cmpany executives, change-in-cntrl scenaris are further categrized int duble-trigger, mdifiedtrigger, and single trigger events, which define the specific terms under which payments are made in cnnectin with a change in cntrl. Duble Trigger: A duble trigger invlves 1) a change in cntrl and 2) a terminatin f the executive s emplyment by the cmpany withut cause r by the executive with gd reasn, as defined by each agreement. Fr duble-trigger prvisins t becme payable, the terminatin must ccur within a specified perid f time befre r after a change in cntrl, als knwn as the terminatin windw. Prudential Financial Inc. (PRU) DEF 14A filed n March 22, 2011 Our executive fficers, including the NEOs, except fr ur CEO, are eligible fr severance payments in the event f an invluntary terminatin f emplyment withut cause. These fficers and ur CEO are als eligible fr duble-trigger severance payments in the event f an invluntary terminatin f emplyment withut cause r a terminatin f emplyment with gd reasn in cnnectin with a change in cntrl f the Cmpany. Mdified Trigger: A mdified trigger invlves 1) a change in cntrl and 2) a terminatin f the executive fr any reasn within a designated terminatin windw befre r after the change in cntrl. This event differs frm a duble trigger in that the executive will receive payments regardless f the reasn fr terminatin. Lwe s Cmpanies, Inc. (LOW) DEF 14A filed n April 11, 2011 The agreements prvide fr certain benefits if the Cmpany experiences a change-in-cntrl fllwed by terminatin f the executive s emplyment: by the Cmpany s successr withut cause; by the executive during the 30-day perid fllwing the first anniversary f the change-incntrl; r by the executive fr certain reasns, including a dwngrading f the executive s psitin. Cause means cntinued and willful failure t perfrm duties r cnduct demnstrably and materially injurius t the Cmpany r its affiliates. Single Trigger: A single trigger invlves nly a change in cntrl and des nt require a terminatin f emplyment. Single trigger prvisins becme payable immediately fllwing a change in cntrl. Cash Multiplier: The cash multiplier is the numerical value by which an executive s salary r the sum f the executive s salary and bnus is multiplied t make up the cash prtin f the change-in-cntrl severance payment. Variatins f the payment frmula depend n the specific definitins f salary and bnus within each agreement. AT&T Inc. (T) DEF 14A filed n March 10, 2011 The Change-in-Cntrl Severance Plan ffers benefits t an fficer wh is terminated r therwise leaves ur Cmpany fr gd reasn after a change-in-cntrl. These benefits include a payment equal t 2.99 times the sum f the executive s mst recent salary and target bnus Equilar, Inc. All Rights Reserved. 3

4 Change-in-Cntrl Cash Multipliers Decrease fr CEOs Fr this analysis, a change-in-cntrl prvisin includes cash payments made in additin t earned amunts, upn terminatin, in cnnectin with a change in cntrl. Cash payments made in cnnectin with a change in cntrl are generally structured as a multiple f (i) an executive s base salary r (ii) the sum f an executive s base salary and bnus. In 2010, 45.3% f the Frtune 100 cmpanies analyzed had change-in-cntrl cash severance plicies in place fr their CEOs, cmpared t 45.8% in While the prevalence f such arrangements has remained stable ver the past tw years, the size f the cash multiple has drpped significantly fr CEOs. The prevalence f a 3x salary multiplier amng CEOs decreased frm 65.9% in 2008 t 44.2% in 2010, while that f a 2x salary multiplier rse frm 18.2% in 2008 t 34.9% in Similarly, the prevalence f a 3x bnus multiplier decreased frm 65.9% t 44.2% in 2010, while that f a 2x bnus multiplier rse frm 15.9% t 32.6% in The fllwing chart cmpares the average cash multiples fr CEOs in 2008 and 2010: 3.00 Average Change-in-Cntrl Cash Multipliers fr CEOs Salary Bnus The disclsure example belw highlights a cmpany which reduced the cash multiplier in its changein-cntrl arrangements between 2008 and 2010, in cmpliance with changing market practices: MetLife Inc. (MET) DEF 14A filed n March 28, 2011 Under this plan, had a change-in-cntrl ccurred n the Trigger Date, and the Named Executive Officer s terms and cnditins f emplyment during the three-year perid beginning with the Trigger Date (Emplyment Perid) nt satisfied specified standards, the Named Executive Officer culd have terminated emplyment and received severance pay and related benefits. [ ] Effective June 14, 2010 the amunt f severance pay that culd be paid under the plan changed frm three times t tw times the sum f the executive s annual salary rate plus the average f the executive s annual incentive awards fr the three fiscal years prir t the change-in-cntrl Equilar, Inc. All Rights Reserved. 4

5 Change-in-Cntrl Cash Severance Multipliers In 2010, 45.3% f CEOs at the Frtune 100 cmpanies analyzed had cash change-in-cntrl payment arrangements in place, while 41.2% f ther NEOs had such agreements. Furthermre, the mst prevalent salary and bnus multiplier fr CEOs was 3x, while that f ther NEOs was 2x. N cmpany prvided fr change-in-cntrl related severance payments with cash multiples greater than 3x. The fllwing charts display the prevalence f salary and bnus multipliers fr CEOs and ther NEOs amng executives wh were eligible fr cash payments in cnnectin with a change in cntrl: 100% CEO Salary and Bnus Multipliers 80% 60% 44.2% 44.2% Salary 40% 34.9% 32.6% Bnus 20% 0% 18.6% 18.6% 2.3% 2.3% 2.3% 0.0% 1x x 1.5x 2x 2.5x x 3x Other NEO Salary and Bnus Multipliers 100% 80% 60% 40% 41.2% 39.6% 30.7% 30.5% Salary Bnus 20% 5.9% 7.8% 9.8% 9.7% 12.4% 12.3% 0% 1x x 1.5x 2x 2.5x x 3x 2011 Equilar, Inc. All Rights Reserved. 5

6 Change-in-Cntrl Payment Triggers Becme Mre Restrictive In 2010, the prevalence f duble-trigger prvisins amng CEOs with change-in-cntrl arrangements was 97.7%, cmpared t 84.1% in The prevalence f mdified-trigger payments declined, frm 15.9% in 2008 t 2.3% in There were n cash prvisins available thrugh a single trigger in either year. The fllwing disclsure example highlights the eliminatin f a mdified-trigger feature between 2008 and 2010: Jhnsn Cntrls, Inc. (JCI) DEF 14A filed n December 10, 2010 The executive fficer als has the right, exercisable during a 30-day perid fllwing the first anniversary f a change f cntrl, t terminate his r her emplyment with us fr any reasn and receive the severance payments and the cntinued medical and welfare benefits we describe abve as if the executive fficer had terminated fr gd reasn. During fiscal year 2009, the Cmmittee eliminated this prvisin fr any new executive fficers elected after September 14, Distributin f Change-in-Cntrl Bnus Definitins While a change-in-cntrl payment frmula is determined largely by the cash multiplier, it is als dependent upn the definitin f the salary and bnus frm which the cash payut is calculated. Thugh the majrity f salary definitins cited variatins f the term annual base salary, bnus descriptins shwed mre variety. The fllwing chart displays the distributin f bnus definitins amng all Frtune 100 executives with change-in-cntrl prvisins fr bnus payments. Other includes descriptins that prvide fr the greater f several bnus definitins, which may include target annual bnus, the average f paid bnuses frm the three years prir t terminatin, etc. Distributin f Bnus Descriptins 8.1% 17.8% 5.1% 10.7% 50.8% Target Bnus Bnus Paid in Prir Year Average f Past 3 Years' Bnus Highest Bnus in Prir 3 Years Other Undefined 7.6% 2011 Equilar, Inc. All Rights Reserved. 6