While change in control (CIC) arrangements face increased scrutiny from regulators, activist shareholders and others, additional strategic reasons exist for management and compensation committees to provide and benchmark executive parachute payments.
The purpose of CIC arrangements is to ensure that executives evaluate every opportunity, including an acquisition, with an eye toward maximizing shareholder value, without considering how such an event will affect their personal circumstances. By addressing CIC provisions in executive compensation packages, boards can be assured that executives will be more likely to approach the intricacies of negotiation without the distraction of personal considerations.
Compensation committees need to utilize parachute payment arrangements as a tool to attract qualified candidates and to reward top performers for the successful results of their strategies.
Shareholders have increased concerns regarding corporate governance. By benchmarking and evaluating executive CIC arrangements, boards and their compensation committees can demonstrate a sense of accountability to both shareholders and regulators.
Average total value of CIC benefits—CFO drop mainly driven by higher turnover rate than CEO.
The most common cash CIC severance multiple for CEOs is between 2x and 2.99x compensation.
Percent of CEOs and CFOs entitled to receive a cash severance payment upon termination with and without a CIC.
Accelerated vesting of long-term incentives (LTI) comprises a large portion of the CIC benefits to which CEOs and CFOs are entitled.
Percent of companies that have unvested equity awards with a double trigger (CIC and termination of employment) by year.
Percent of CEOs and CFOs that are entitled to excise tax gross-ups. The company pays the executive the amount of any excise tax imposed, thereby making the executive “whole” on an after-tax basis.
2 of the 5 companies had existing gross-ups for their CEOs
1 of the 5 companies added a gross-up as part of the deal negotiations
1 of the 5 companies offered its CEO a valley provision
1 of the 5 companies did not disclose excise tax treatment
Republished with permission from Alvarez & Marsal’s 2019/2020 Executive Change in Control Report.