Survey Data re Change in Control Severance Benefits
2021.02.23. Executive Change-in-Control Arrangements (from Meridien Compensation Partners) is offering a report drawn from a survey of 200 component companies of the S&P 500® index (“Study Group”). Its key findings are published and quoted here:
- 75% of Study Group companies reported maintaining CIC arrangements that provide cash severance benefits to one or more Named Executive Officers (“NEOs”).
- 100% of these companies condition the payment of cash severance upon the occurrence of a double-trigger event (i.e., involuntary termination without “cause” or voluntary termination for “good reason” that occurs within a specified period following a CIC (i.e., “protection period”).
- 76% of companies define protection period as the 24-month period following a CIC.
- Nearly all companies determine cash severance based on a “multiple” of the sum of an NEO’s base salary and “annual bonus.”
- Cash severance multiples are trending down for all NEOs.
- For CEOs, a 3× cash severance multiple remains the majority but declining practice, while a 2× multiple is growing in prevalence.
- For all NEOs (other than the CEO), a 2× cash severance multiple is the majority practice.
- Approximately 95% of Study Group companies vest time-based and performance-based equity awards either upon (i) a double-trigger event or (ii) a CIC to the extent that a successor entity fails to assume or replace such awards.
2019/2020 Executive Change in Control Report from Alvarez & Marsal and Equilar, with a few key findings being quoted here from the report:
- "The prevalence of a 3x or higher severance multiple for CEOs slightly decreased from 33% in 2017 to 31% in 2019."
- An increase from 83% (2015) to 97% (2019) of surveyed companies "have unvested equity awards with a double trigger (CIC and termination of employment)."
- 15% "of top 20 mergers in 2019 added a gross-up for either the CEO or CFO during deal negotiations (average cost of approximately $8.6 million)."
2017/2018 Executive Change in Control Report from Alvarez & Marsal analyzes "the pay practices of the top 200 public companies across 10 different industries," with some key findings being quoted here from the report:
- excise tax gross-ups have fallen out of favor and have significantly declined in prevalence over the past several years. Meanwhile, “valley provisions” or “best net,” which cut back amounts to avoid excise tax if it is more financially advantageous to the executive, are on the rise. [Note there is an excellent chart showing in 2011 that 50% of surveyed companies providing tax gross-ups compared to 10% providing best net, with a reversal of that data by 2018 with 40% providing best net and only 10% grossing up.]
- Long-term incentives make up about 67.5% of the average total change in control amounts for CEOs and Other NEOs. Over the last several years, we’ve observed a substantial increase in double-trigger vesting (change of control and termination of employment required to accelerate vesting of equity awards). [This data shows the high stakes involved with defining CIC severance benefits by reference to more than salary and bonus amounts.]
2016 Golden Parachute Report from Alvarez & Marsal begins by explaining that "Change in control benefits can include severance payments, accelerated vesting and payment of equity awards (such as stock options or restricted stock), fringe benefits, and gross-up payments for excise taxes imposed as a result of Internal Revenue Code Sections 280G and 4999." The report then provides significant survey data about golden parachute, such as:
- Just 17 percent of CEOs are entitled to receive “gross-up” payments. . . . This is a substantial decrease from 2007, when this benefit was provided to 66 percent of CEOs. [See accompanying chart.]
- The two most common equity acceleration triggers are the single trigger (only a change in control must occur) and double trigger (change in control and termination of employment must occur). We continue to see a shift from a single-trigger toward double-trigger vesting. Accordingly, double-trigger vesting has significantly increased as shown in the chart below. [The chart shows that the use of double triggers increased from 28% in 2009 to 82% in 2015.]
2015.Oct.08 Change in Control Benefits - Enhanced Below NEO Level. This Towers Watson survey of 137 North American companies reports, for example, that in the event of a change in corporate control --
- 67% offer cash severance plus accelerated vesting of equity awards to employees below the named executive officer level, and
- 40% offer enhanced severance to employees below the senior vice president level.
- "The survey results highlight an important point: severance can be a very powerful and potentially less expensive tool (as compared to cash retention programs) for retaining a broad group of employees during times of uncertainty."
2015.June Change in Control Benefits. This Hay Report provides the following summary survey finding for executive-level severance (quoting from the report):
- Two times base salary [and bonus] was the most common multiple (and the median as well), followed by one- and three-year salary multiples (which were significantly less common).
- With respect to a CIC, companies tend to use pay multiples that are larger than for general severance events. Three times base salary (49.2 percent of companies) was the most common. Further, CIC severance multiples including the CEO’s bonus were disclosed by 186 companies; three times bonus was the most common (49.7 percent of companies).
- While our research did not specifically focus on CIC pay multiples for executives other than CEOs, we observed that multiples for non-CEO executives typically were lower than for the CEO. These other executives often received one to two times salary plus bonus, in some cases depending on whether an individual is a named executive officer.
2015.Feb Change in Control Benefits - Tech & Life Sciences. This Radford "Getting it Right" Survey of 240 public and private companies provides separate date for broad-based employee severance plans, as well as those limited to executive officers. The findings for the latter group include the following (quoting from the report):
- Double trigger requirements for change-in-control agreements are on the rise. Nearly 75% of companies that offer CIC severance coverage to executives now require an employee to be terminated in order to receive change-in-control benefits.
- Most companies provide a protection period of a year under a double trigger change-in-control event. CEOs, NEOs and vice presidents typically receive CIC coverage for any termination occurring within 12 months of a change-in-control event.
- CEO base salary and benefits continuation packages typically range from 12 to 24 months in value for both CIC coverage and not-for-cause severance. For NEOs and vice presidents, that range is typically six to 12 months in length, on average.
- Companies are divided over the use of equity acceleration. Around 31% of companies accelerate CEO and NEO equity for not-for-cause severance. However, only 17% do so for the vice president level. Equity acceleration is more popular in connection with change-in-control events, where 65% of companies provide this benefit (about 20% of this group is single trigger).
2014.Nov CIC Severance Benefits - Broad Study. A World at Work survey of 589 companies provides comprehensive data about broad-based employee severance plans, as well as those limited to executive officers. The findings for the executive group include the following:
- Over 50% of companies provide executives with 12-24 months of change in control severance benefits;
- From 2005 to 2014, there has been a dramatic shift from single trigger to double trigger conditions for severance.
- Significant data is available for changes from 2003 to 2014, both for employee-wide severance practices and those at the executive level.
2013/2014 Executive Severance and CEO. Here are a few highlights of this well presented "Executive Change in Control Report" by Alvarez & Marsal, drawn from data for the 20 largest companies (by market cap) in 10 different industry classifications (quoting from the report):
- The most common cash severance multiple for CEOs is between two (2) and three (3) times compensation (43 percent). The prevalence of a three (3) times multiple has fallen to 42 percent in 2013 from 51 percent in 2011.
- 77 percent of Other NEOs are entitled to receive a cash severance payment in connection with a change in control. . . . The most common cash severance payment provided is between two (2) and three (3) times compensation and the average multiple is 2.19 times. 60 percent of companies with cash severance payments provide a severance benefit between two (2) and three (3) times compensation, while 16 percent provide three (3) times compensation.
2013.Sept. Healthcare CEO - Severance Survey. Here are a few highlights of this well presented study by Mercer et al, drawn from 186 health care organizations:
- 83% provide their CEOs with severance through individual agreements.
- 65% provide change-in-control benefits; 29% for nonrenewal.
- 88% determine benefits over a period of 12-24 months (49% at 24; 14% at 18; 25% at 12).
- 73% base severance on salary alone; 18% use salary and bonus.
- 68% require noncompetes -- with 62% of noncompetes for 2 years; 34% are for less.
2011.June.24 Value of "Golden Parachute" Payments Increased by 32 Percent in Past Two Years -- Study by Alvarez & Marsal. Key findings quoted here from the report:
- The average change in control benefit provided to CEOs has increased 32 percent over the past two years, rising to $30.2 million in 2011 from $22.9 million in 2009.
- 80% 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% of financial services companies.
20 11.March.14 "Contractual Versus Actual Severance Pay Following CEO Turnover" reports that "about 40% of S&P500 CEOs who leave their firm receive separation payments that are in excess of what the firm is legally required to give them based on their existing contract. Furthermore, we find that the average discretionary separation pay is around $8 million - close to 242% of a CEO’s annual compensation." ... Further, "We hypothesize that in cases when the CEO departure is voluntary, discretionary separation pay represents a governance problem."
2010.Aug.3 Relative to Employer's Market Cap. See Exequity Report:
- "Exequity compiled CIC-related termination benefit values for 500 companies covering a wide spectrum of industries, company size, and Fortune 1000 rankings."
- "Median CIC benefit values for CEOs range from 0.07% of market cap for the largest companies with over $50B in revenue to 0.61% of market cap for smaller firms ($0.5B to $1B in revenue)."
- "CIC benefits for the NEO group, including the CEO, range from 0.16% of market cap for large firms to 1.44% for smaller companies."
- "Independent of company revenue, CEO CIC benefits are between approximately 40% and 45% of the total CIC cost for the top five, or an internal equity ratio of approximately 2.7 to 3.3 between the CEO CIC benefits and those for an ―average‖ NEO below the CEO."