Investors have more input into executive compensation practices than ever, and this feedback has led to more transparency. In particular, change-in-control (CIC) provisions—i.e., severance payouts in connection with mergers and acquisitions—are facets of executive compensation often surrounded by criticism, according to a new report from the Executive Compensation Practice of Alvarez & Marsal, which analyzed disclosures on change-in-control agreements for the top 200 publicly traded companies in the U.S.
Since the firm’s previous study, disclosed change-in-control benefits for CEOs at these companies actually decreased in value, down from $30.3 million in 2015 to $27.9 million in 2017. The average benefit for all other named executive officers (NEOs) also decreased slightly, from $12.3 million to $11.1 million (Figure 1).
One of the driving factors in this decline is actually a decrease of long-term incentives (LTI) as a portion of change-in-control benefits. The fact that LTI values have moderately decreased from the previous survey is surprising given the increasing prominence of equity awards in recent years. Larger grants combined with increasing stock prices should have a positive effect on the value of LTI awards in the potential payments table.
However, one possible reason for the decline may be the decreasing prevalence of option grants. Since the stock market is high and option grants tend to encompass a larger number of shares than stock grants, there could have been a large amount of highly in-the-money options that vested between 2015 and 2017, which would have brought the LTI value down.
An Equilar study of actual CIC payments taken from golden parachute tables in 54 mergers occurring between 2013 and 2015 found consistent results with the information in the Alvarez & Marsal report. For example, 2015 CEO long-term incentive (LTI) compensation accounted for 70% of the potential payments and 67.5% in 2017. Comparatively, Equilar found that CEO LTI compensation accounted for 69.1% of actual golden parachute payments (Figure 2).
The numbers for severance to outgoing executives in connection with a merger or acquisition are often eye-popping, and as a result are a popular target for scrutiny not only from investors, but also from the media and general public when they arise. However, change-in-control payouts are reflections of executive compensation design, as the report shows, and they exist to incentivize company leaders to act in the best interest of the organization when potential opportunities arise to sell or combine a company. Investor votes for compensation plans via Say on Pay or other shareholder proposals around equity and incentive plans ultimately determine the outcome of these exit packages. If there are concerns around executive payouts, they should arise well before the final hour when the company is sold or merged.
Charlie Pontrelli is a project manager with Equilar. Dan Marcec is the editor-in-chief of C-Suite magazine and the director of content at Equilar.