In 2007, the SEC required public companies to provide proxy-based disclosure of the potential value of severance and change-in-control (“CIC”) payments to proxy-level named executive officers (“NEOs”). Since then, senior executive severance and CIC programs have been subject to increased/intense scrutiny by shareholders, shareholder advisors, institutional investors, and, more recently, legislators.

Introduction

Compensation Advisory Partners’ 2011 Executive Change-in-Control and Severance Report provides:

• A comprehensive review of current senior executive (Named Executive Officers) CIC and severance practices among two datasets, based on proxy statement disclosures and incentive plan documents:
  1. Dow Jones Industrial Average Component Companies (“Dow 30”)
     

     Dow 30 Companies (n=30)	Revenues	Market Cap. as of 12/31/2010	Number of Employees
     	($MM)	($MM)	(000s)
     Median	$62,036	$111,583	127

  2. “Mid-Sized” companies reflecting 20 Fortune 1000 companies with revenues closest to $2.75B (“Mid-Sized Companies”)
     

     Mid-Sized Companies (n=20)	Revenues	Market Cap. as of 12/31/2010	Number of Employees
     	($MM)	($MM)	(000s)
     Median	$2,753	$4,155	6

• A review of changes to senior executive (Named Executive Officers) CIC and severance practices from 2007 – 2010 among the Dow 30 (market leading / trend setting companies)

• Observations regarding our findings, recent trends and near-term outlook

Executive Summary

In 2007, the SEC required public companies to provide proxy-based disclosure of the potential value of severance and change-in-control (“CIC”) payments to proxy-level named executive officers (“NEOs”). Since then, senior executive severance and CIC programs have been subject to increased/intense scrutiny by shareholders, shareholder advisors, institutional investors, and, more recently, legislators.

As a result, many companies have revised their severance and CIC policies to provide less generous payments upon CIC and/or termination, and others have eliminated these programs or scaled back eligibility. Still, “golden parachute” payments remain a high-profile element of pay packages. Benchmarking existing plans against other companies can help validate existing benefits or indentify opportunities to adjust arrangements.

• CAP’s study found that 60% of the Dow 30 and 85% of our Mid-Sized company dataset currently provide CIC-related cash severance benefits to NEOs through a formal program or individual contracts, and nearly 90% of the companies reviewed provide CIC/severance-related benefits when long-term and annual incentive plan provisions are included.
• Cash severance multiples for NEOs have not changed significantly for Dow 30 companies over the past three years, and CEO cash severance formulas are comparable among larger and smaller sized companies studied. Among the Dow 30, double trigger equity vesting upon a CIC (requiring a termination of employment and a CIC) has increased in prevalence from 50% (in 2007) to 70% in 2010, and double trigger provisions are equally prevalent among our sample of Mid-Sized companies. While excise tax gross-ups have become a minority practice among the Dow companies, they are still prevalent among Mid-Sized companies.

Outlook

We have witnessed changes to CIC- and severance related benefit provisions at a somewhat accelerated pace over the last 12-24 months and expect the general market trend of benefit reduction to continue. We also expect the policies and practices of smaller market capitalization. companies to migrate towards those of larger companies, following the lead of companies such as the Dow 30, and resulting in new “best practices” in this arena overall.

Element of Pay	NOTABLE FINDINGS
	Dow 30	Mid-Sized Companies
Cash Severance (CIC)	Prevalence CEO: 57% (17 of 30 cos.); consistent with 2007 NEOs: 57% (17 of 30 cos.); consistent with 2007	Prevalence CEO: 85% (17 of 20 cos.) NEOs: 85% (17 of 20 cos.)
	Multiples – Most Prevalent CEO: 47% use ?2.99x (unchanged since 2007) NEOs: 30% use ?2.99x; 29% (5 of 17 cos.) use 2x and “Other” (nearly unchanged since 2007)	Formula– Most Prevalent CEO: 70% calculate payment using “base + bonus” NEOs: 70% calculate payment using “base + bonus”
	Formula – Most Prevalent CEO: 71% calculate payment using “base + bonus” (down from 76% in 2007) NEOs: 71% calculate payment using “base + bonus” (down from 76% in 2007)	Multiples– Most Prevalent CEO: ?2.99x is the most prevalent multiple (50%) NEOs: 2x is the most prevalent multiple (50%)
	Definition of Bonus – Most Prevalent CEO: 83% incorporate the target bonus value (up from 69% in 2007) NEOs: 83% incorporate the target bonus value (up from 69% in 2007)	Definition of Bonus – Most Prevalent CEO: 50% incorporate the target bonus value NEOs: 43% incorporate the target bonus value
	Bonus Payment in Year of Termination– Most Prevalent CEO: 29% use target; 24% use actual; 47% do not contractually commit to providing a bonus (consistent with 2007) NEOs: 35% use target; 12% use actual; 53% do not contractually commit to providing a bonus (consistent with 2007)	Bonus Payment in Year of Termination– Most Prevalent CEO: 45% use target; 25% use actual; 30% do not contractually commit to providing a bonus NEOs: 35% use target; 30% use actual; 35% do not contractually commit to providing a bonus
Treatment of Equity (CIC)	Acceleration – Prevalence CEO / NEOs: 80% (24 of 30 cos.); consistent with 2007 Trigger – Most Prevalent Nearly 70% use double-trigger vesting of equity (up from 50% in 2007)	Acceleration – Prevalence CEO / NEOs: 100% (20 of 20 cos.) Triger – Most Prevalent 75% use double-trigger equity vesting
Tax Gross-Ups	Prevalence CEO: 81% of companies do not provide any form of tax gross-up on CIC payments (up from 65% in 2007) NEOs: 84% of companies do not provide any form of tax gross-up on CIC payments (up from 65% in 2007) All but one company providing some form of a tax gross-up to the CEO and/or NEOs have “grandfathered” this benefit for current executives and committed to prospectively not offering the benefit to future participants	Prevalence CEO: 50% provide excise tax gross-up and 30% of companies do not provide any form of tax gross-up on CIC payments NEOs: 50% provide excise tax gross-up and 35% of companies do not provide any form of tax gross-up on CIC payments 1/3 of the companies providing some form of a tax gross-up to the CEO and/or NEOs have “grandfathered” this benefit for current executives and committed prospectively to not offering the benefit to future participants
Cash Severance Multiples (Non-CIC)	Multiples – Most Prevalent CEO: 57% have a multiple of 2x – 2.99x (down from 63% in 2007) NEOs: 42% have a multiple of 2x – 2.99x (generally consistent with 2007)	Multiples – Most Prevalent CEO: 29% use 2x – ?2.99x; 24% use 1x – <1.99x NEOs: 35% use 1x – <1.99x