2012 STUDY OF EXECUTIVE
TERMINATION PROVISIONS
AMONG TOP 200
PUBLIC COMPANIES
December 2012
James F. Reda & Associates
A Division of Gallagher Benefit Services
1500 Broadway, 9th Floor
New York, New York 10036
www.jfreda.com
Main: (646) 367-4460
Fax: (212) 898-1148
C ONTENTS
Introduction ...................................................................................................................................................................3
Overview of Study .........................................................................................................................................................4
Objectives ........................................................................................................................................................4
Data .................................................................................................................................................................4
Procedures .......................................................................................................................................................4
Study Findings ...............................................................................................................................................................5
Cash Severance – Termination without Cause and Change in Control ...........................................................5
Treatment of Equity ........................................................................................................................................8
Other Benefits ............................................................................................................................................... 14
Termination without Cause or for Good Reason............................................................................. 14
CIC followed by Qualifying Termination ....................................................................................... 14
Excise Tax Gross-Ups ................................................................................................................................... 15
Termination Summaries ................................................................................................................................ 16
Termination for Cause .................................................................................................................... 16
Voluntary Termination Except for Good Reason............................................................................ 16
Termination without Cause ............................................................................................................. 16
Termination for Good Reason......................................................................................................... 17
Termination Due to Death............................................................................................................... 17
Termination Due to Disability ........................................................................................................ 18
Termination Due to Retirement ...................................................................................................... 18
Termination Resulting from a Change in Control ........................................................................... 20
Conclusions ................................................................................................................................................................. 20
Appendix 1 .................................................................................................................................................................. 21
S&P 500 Large Cap Companies – Top 200 .................................................................................................. 21
Appendix 2 .................................................................................................................................................................. 23
Summary of Top 200 Companies by Industry Code ..................................................................................... 23
About James F. Reda & Associates, a Division of Gallagher Benefit Services, Inc. .................................... 24
2
I NTRODUCTION
Since the beginning of the recession in late 2007 we have seen numerous reports on what has been
characterized as excessive executive pay. The seeming disconnect between company performance and
executive pay, especially at financial services companies, led to the passage of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd-Frank”) in 2010. The most visible part of Dodd-Frank is Say on
Pay, which is approaching the completion of two proxy disclosure cycles.
There has also been much media attention on severance payments, often reported as golden parachute
payments, to CEOs and other high-level executives who have resigned, retired or been terminated at
companies that have under-performed. This public concern over excessive severance payments to executives
resulted in a “Say on Golden Parachute” provision of Dodd-Frank, which is also close to completing two years
of voting. This Dodd-Frank requirement generally requires a shareholder advisory vote on any agreements
or understandings that the company has with any of its named executive officers that provides compensation
based on a merger or other acquisition.
However, most of the media coverage has been in regard to excessive executive severance payments or what
are perceived as large “walk-away” payments that are not merger-related. A steady stream of these
sensational stories began in 2007 with extensive coverage of multi-million dollar packages to Bob Nardelli
(Home Depot), Stanley O’Neal (Merrill Lynch), Charles Prince (Citigroup), Peter Boneparth (Jones Apparel),
Mark Hurd and Leo Apotheker (Hewlett-Packard) just to name a few. Therefore, it makes sense for corporate
directors to pay attention to executive severance benefits provided in employment agreements and severance
agreements.
This study provides a behind-the-scenes look at how cash and equity termination provisions are being
structured at the largest 200 U.S. public companies. We believe this is the most comprehensive study to date
in an area of compensation and benefits that has received scant analysis over the years.
There are four broad issues for all companies to consider relating to severance payments and the treatment
of unvested equity, which are as follows:
•
•
•
•
Multiple of salary (and bonus) for determining cash severance;
Equity—full acceleration, continued vesting, pro-rated acceleration, committee discretion,
forfeiture, additional time to exercise;
Tax gross-ups and implications related to termination provisions; and
Tax implications related to termination provisions.
Outside advisors, lawyers and consultants play a substantial role in the process of establishing employment
agreements (including severance-related), incentive plans, equity award agreements, and the policies that are
embedded in these documents for senior executives. The unique environment of the company and the
individual needs of executives must be considered as compensation-related programs are designed. In
addition to these considerations, public scrutiny of executive pay decisions and practices complicates the
overall process of establishing the proper protections for both the executive and the company.
With this study, the lack of reliable information is being addressed. This snapshot of current market practice
should be an invaluable aid for developing agreements, plans and polices that are appropriate for each
situation.
3
In order to determine the design of severance benefits, James F. Reda & Associates, a Division of Gallagher
Benefit Services, Inc., conducted a study of the 2011 annual proxy statement disclosures for 200 of the top
U.S. public companies (based on market value). A list of the companies studied is included in Appendix 1. The
sector mix was led by capital goods companies, details of which are shown in Appendix 2.
This study is an offshoot of our annual study of short-and long-term incentive design for this same group of
companies. Our incentives-based study (which is in its sixth year of publication) focuses on three of the four
main factors (excluding actual performance levels) that impact the alignment of pay and performance and are
crucial to the overall executive program design. This study focuses on the fourth factor, which is shown
below:
•
•
•
•
Performance measures;
Pay-for-performance formula (minimum, target, and maximum levels for performance goals and
payout levels);
Long-term incentive pay mix; and
Severance pay.
Finally, a specially thanks goes to Ashley Lawton of Hogan Lovells US LLP for assisting with this study,
especially her contributions on taxes and tips.
O VERVIEW OF S TUDY
O BJECTIVES
The objectives of the research study were:
•
•
•
To identify the primary characteristics of various types of termination benefits provided to
executives;
To identify trends in termination provisions based on comparisons with prior research; and
To provide tips and suggestions for use in developing executive termination provisions.
D ATA
The data used for this study was collected from SEC filings, in most cases from proxy statements but also from
severance agreements, employment agreements, and incentive plans. Information is generally provided in the
Compensation Discussion and Analysis (“CD&A”) and related tables. The data was disclosed by companies in a
variety of ways, including tables, descriptive text, and footnotes.
P ROCEDURES
We examined the following termination events and corresponding cash and equity-related treatment:
•
•
•
For Cause;
Voluntary Resignation;
Without Cause (involuntary termination);
4
•
•
•
•
•
Constructive Termination (with “Good Reason”);
Death;
Disability;
Retirement; and
Change in Control (CIC).
For the purposes of providing comparable analysis given the variability of reporting and data, judgments
were made as to the best ways to combine data. The data was carefully reviewed for completeness and
accuracy. We reviewed proxies for companies with fiscal years ending through January, 2012.
S TUDY F INDINGS
C ASH S EVERANCE – T ERMINATION
WITHOUT
C AUSE
AND
C HANGE
IN
C ONTROL
Our study found that 35% of CEOs and 31% of other Named Executive Officers (“NEOs”) are not eligible to
receive severance benefits beyond the general employee population for termination without cause. In the
case of a change-in-control, it drops to 28% of CEOs and NEOs who are not eligible for additional benefits.
For the majority of executives eligible for executive severance benefits, there have been noticeable changes.
Over the past several years we have witnessed a downward trend in salary and bonus severance multiples.
This downward compression can be attributed primarily to the pressures exerted by proxy advisors such as
Institutional Shareholder Services (“ISS”) and Glass Lewis in regard to CIC severance multiples. Over the past
five to seven years, CEO severance multiples for a CIC-related termination have trended downward from 3x
or higher to 2x salary and bonus for termination following a CIC. For example, our 2009 CIC study of 2007
proxy filings for a randomly selected group of 100 companies in the S&P 500 indicated 56% of CEOs had a
severance multiple of 3x or higher. Four years later, this number is down to 40% of CEOs. While 3x or higher
is still the most prevalent case, there has been a corresponding increase in multiples of 2x. In most cases
(over 90%), these severance multiples are applied to the current salary and bonus of the executive. For
multiples greater than 3, the multiplier is usually only applied to base salary. In every case, cash payments
are triggered by both a CIC and termination without cause or for good reason (“double trigger”).
Change in Control Severance Multiples: 2007 vs. 2011
Percentage of Companies
Severance Multiple
CEO
>3x
2%
2007
Other NEOs
0%
CEO
2%
2011
Other NEOs
1%
3x
53%
37%
38%
23%
2x
9%
22%
20%
30%
3%
6%
5%
6%
2.99x
2.5x
1.5x
1x
Other
0x (no cash severance)
8%
2%
1%
3%
19%
5%
3%
2%
6%
19%
7%
2%
2%
3%
21%
6%
2%
5%
6%
21%
Note: 0x means no cash severance disclosed. Accordingly, it is presumed no severance is provided.
5
When the CIC multiple includes bonus, we found a variety of approaches used to define the bonus amount.
The most commonly used bonus definition is target bonus which was disclosed for 58% of CEOs and 55% of
CFOs. The next most common definition was average paid in last two or three years (15%). The following
table shows the most commonly used definitions.
Bonus Definitions Included in Change in Control Multiple: 2011
Percentage of Companies
Bonus Definition
CEO
Other NEOs
Target
58%
55%
Highest paid last 3 (or 2, 5) years
6%
6%
Average paid last 3 (or 2) years
15%
Greater of target or average paid (last 3/2 years)
17%
6%
Other
5%
15%
17%
Note: ‘Other’ includes variations of the above such as the greater of target or prior year paid, highest paid the
prior three years or target, highest target bonus the last two years, and so forth.
In 2007, target was used less frequently, with a prevalence of 40%. This was partially offset by a higher
percentage of companies using the greater of target or average paid the last three years (13%). Use of
average paid and the highest paid have remained essentially unchanged from 2007 to 2011.
Severance multiples in non-CIC situations are often lower than those related to a CIC when the CIC multiple is
set at 3x. In other words, a CEO with a CIC severance multiple of 3x will most likely have a non-CIC severance
multiple of 2x. However, if a CEO has a CIC multiple of 2x, the non-CIC multiple will also be 2x or slightly
lower. In many of these instances the CEO might not have a specific CIC multiple but rather has a multiple for
all qualifying termination situations. Over 75% of the multiples in non-CIC severance-related terminations
apply to the executive’s salary and bonus.
Non- Change in Control (Without Cause/Good Reason) Severance Multiples: 2011
Percentage of Companies
Severance Multiple
CEO
Other NEOs
>3x
2.5%
0.5%
2x
30%
21%
2%
1.5%
3x
2.99x
1.5x
1x
Employment Agreement Term
Other
0x (no cash severance)
6%
1.5%
2%
7.5%
10%
38.5%
3%
1%
9%
14%
13.5%
36.5%
6
Comparing CEO Severance Multiples: 2011
Multiple for
Severance Without
Cause/Good Reason
Percentage with CIC Multiple
of 2x or 3x
CIC = 3x
CIC = 2x
0
20%
23%
2
41%
69%
12%
8%
1
3
All Other
10%
0%
17%
NA
Severance multiples for termination without cause or for good reason are also applied most often to salary
plus bonus, but it is not as prevalent as a CIC-related termination. Ninety-three percent (93%) of CIC
multiples use salary plus bonus as compared with 75% (2x multiple) to 78% (3x multiple) for non-CIC
termination without cause or for good reason. As with a CIC-related termination, the most commonly used
bonus definition is target bonus which was disclosed for 59% of CEOs and 67% of CFOs.
Bonus Definitions in Non-CIC (Without Cause/Good Reason) Multiple: 2011
Percentage of Companies
Bonus Definition
CEO
Other NEOs*
Target
59%
67%
Last Paid
4%
4%
Last 3 Years Average Paid
Highest Paid Last Three Years
Greater of Target or Last 3 Years
Average Paid
Other
* Rounded values sum to 99% (1% = 1.4%)
15%
4%
3%
15%
12%
1%
1%
14%
In addition to receiving a specified multiple of salary and bonus, severance related termination without cause,
for good reason or in conjunction with a CIC also often includes payment of some portion of the current year
bonus. It is not unusual for a bonus to be paid in cases of retirement, death, or disability as well, but a bonus
is never paid when an executive terminates for cause or voluntarily. The following table shows how NEO
bonuses for the current year are determined in a severance situation.
7
Current Year Bonus Payment Determination Upon Termination: 2011
Percentage by Termination Type
CIC
Without
Cause/ Good
Reason
Retirement
Death
Disability
45%
35%
72%
56%
58%
Companies Disclosing
Details
55%
65%
28%
44%
42%
Full Year Payment
16%
11%
11%
15%
14%
3%
7%
9%
6%
5%
9%
4%
2%
6%
5%
Bonus Payment
Determination
Companies Not Disclosing
Bonus
Actual Performance
Average Paid in Prior Years
Target Level
Prorated Payment
Actual Performance
Average Paid in Prior Years
Target Level
Other
T REATMENT
OF
E QU ITY
0%
0%
3%
4%
76%
78%
72%
71%
72%
10%
22%
21%
16%
17%
30%
16%
11%
13%
12%
4%
6%
13%
7%
8%
4%
32%
Board Discretion
Other
4%
4%
3%
37%
4%
2%
38%
5%
3%
39%
7%
4%
39%
7%
When an executive termination occurs, it is likely that the executive is holding a substantial amount of
unvested equity. The value of these unvested equity awards can often dwarf the value of any cash severance
paid to the executive. How this equity is treated varies by type of termination and by type of equity award.
Generally, for termination with cause or voluntary resignation, not including retirement, long-term awards
are almost always forfeited.
For time-vested equity like stock options or restricted stock, if the NEO is terminated without cause nearly
one-half of companies require the forfeiture of awards. Approximately 30% of companies allow full
accelerated vesting of awards at termination. The remaining companies provide prorated or partial vesting or
allow vesting to continue as if still employed.
8
Performance-based awards are treated differently whereby most companies provide accelerated vesting on a
prorated basis rather than full vesting. As with time-vested awards, about one-third of companies require
forfeiture of these awards upon termination without cause or for good reason.
Performance-based awards are treated differently whereby most companies provide accelerated vesting on a
prorated basis rather than full vesting. Forfeiture of these awards upon termination without cause or for
good reason occurs at slightly less than one-half of the companies (40% for CEOs to 49% for other NEOs).
If the LTIP plan or agreement allows payout of incentive compensation at target levels upon the executive’s
termination without cause, voluntary resignation for good reason, or retirement, the compensation does not
meet the requirements of “qualified performance-based compensation” regardless of whether the event
occurs. IRS’s position is that these are not included in the list of permissible payment events in the Section
162(m) regulations. Therefore to qualify these grants for 162(m) the payments must be subject to
performance goals and is payable at the same time as it was otherwise payable. In our study we found that in
cases of acceleration, whether partial, prorated, or full, that payments were based on actual performance
against pre-established goals. In a few cases companies also indicated vesting continued with payments
based on actual results.
Without Cause
LTIP Performance
Payout Base
Full Actual
Good Reason
Retirement
CEO
Other
NEOs
CEO
Other
NEOs
CEO
Other
NEOs
7%
3%
9%
6%
12%
12%
15%
7%
4%
Prorated/Partial Actual
26%
23%
31%
18%
Continued Vesting
12%
10%
12%
9%
18%
19%
52%
18%
17%
Target (Full or Prorated)
Committee Discretion
Forfeiture
10%
3%
42%
12%
3%
49%
17%
0%
31%
0%
40%
5%
41%
7%
For this study we define partial acceleration as a situation when a portion of outstanding equity awards vest
either in full or on a prorated basis. For example, for RSUs or restricted shares, partial acceleration indicates
that not all outstanding RSUs or restricted shares accelerate. For example, Bristol-Myers-Squibb includes the
following footnote: “For involuntary termination, represents pro-rata portion of awards held at least one
year.”
Prorated vesting refers to the proportionate vesting of unvested grants based on time or performance
criteria.
9
Disposition of Stock Options/SARs Upon Termination: 2011
Termination Scenario
Percentage of Companies
Prorated
Partial
Full
Forfeiture Acceleration Acceleration Vesting
Continued
Vesting
Discretion
/Other
With Cause-CEO
100%
0%
0%
0%
0%
0%
Voluntary Resignation-CEO
98%
0%
0%
1%
1%
0%
Without Cause (Excl CIC)-CEO
48%
2%
4%
28%
16%
2%
Good Reason (Excl CIC)-CEO
39%
2%
7%
43%
9%
0%
Death-CEO
11%
1%
3%
77%
7%
1%
Disability -CEO
16%
1%
3%
64%
15%
1%
Retirement-CEO
28%
3%
5%
32%
30%
2%
Change in Control-CEO
4%
0%
0%
93%*
1%
2%
With Cause-CFO
Voluntary Resignation-CFO
Without Cause (Excl CIC)-CFO
Good Reason (Excl CIC)-CFO
Death-CFO
Disability -CFO
Retirement-CFO
Change in Control-CFO
100%
99%
55%
55%
11%
17%
31%
3%
0%
0%
2%
2%
1%
1%
2%
0%
0%
0%
3%
4%
3%
3%
6%
0%
0%
0%
22%
31%
75%
61%
29%
92%*
* Full vesting at termination date including both single trigger and double trigger as part of a CIC
0%
1%
16%
8%
8%
16%
30%
2%
0%
0%
2%
0%
2%
2%
2%
3%
In the case of a CIC there has been a distinct shift from single trigger accelerated vesting to double trigger
accelerated vesting. In our prior study of 100 randomly selected S&P 500 companies we found that 71% of
companies had single trigger acceleration of equity in 2007. As of 2011, only 28% disclosed a single trigger
policy while another 2% indicated a mix of single trigger and double trigger provisions. This dramatic change
in equity triggers is primarily attributable to ISS “encouraging” the use of double-trigger vesting.
10
For both vested and accelerated stock options and SARs, executives often have a specified time limit within
which the options or SARs must be exercised. This time limit will be the lesser of the specified time limit or
the remaining term. For a voluntary termination, termination without cause or for good reason (all unrelated
to a CIC), 90 days or three months is most common. For termination following a CIC, the most common
exercise period is the remaining full term when the award is converted to shares in the new company.
For death, disability, or retirement, most companies allow the executive or the executive’s estate at least one
year to exercise all outstanding stock options or SARs, with many companies allowing exercises up to the full
term.
Number of Years to Exercise CEO Stock Options/SARs Upon Termination: 2011
Percentage of Companies
Termination Scenario
With Cause
<.3
Mths
3
Mths
1
Year
8%
28%
1%
1%
7%
38%
10%
7%
1%
27%
Voluntary Resignation
12%
Good Reason (Excl CIC)
3%
Without Cause (Excl CIC)
Death
Disability
Retirement
Change in Control
0%
0%
0%
0%
50%
32%
1%
3%
6%
2%
10%
23%
6%
16%
2
3
Years Years
1%
Full
Term
0%
0%
0%
3%
59%
7%
7%
13%
7%
4%
14%
15%
30%
13%
28%
2%
8%
10%
3%
13%
6%
2%
6%
No Exercise
Past
Other Termination
5
Years
9%
1%
8%
20%
11%
3%
7%
11%
13%
34%
3%
40%
42%
3%
5%
8%
22%
5%
3%
3%
3%
2%
Tax rules limit the length of the post-termination exercise periods for ISOs. If the executive is terminated
other than as a result of death or disability, the executive must continuously be an employee from the grant
date of the option until three months prior to exercise to receive ISO treatment.
If the executive is terminated as a result of “disability” (specifically defined in the ISO rules), the executive
must continuously be an employee from the grant date of the option until one year prior to the exercise to
receive ISO treatment
If the executive’s employment is terminated as a result of death, the executive’s personal representative can
exercise the option until the expiration of its term, although companies generally limit the post-termination
exercise period following the executive’s death.
The following two tables are for the CEO. The results for other executives are very similar with two
exceptions. Forfeiture rates are higher by 5 to 7 percentage points while full acceleration is correspondingly
lower by 5 to 7 percentage points for termination without cause and for good reason.
11
Disposition of CEO Time Vested Restricted Stock Upon Termination: 2011
Termination Scenario
Forfeiture
With Cause
99%
Without Cause (Excl
CIC)
46%
Voluntary Resignation
Good Reason (Excl CIC)
Death
0%
0%
Continued
Vesting
0%
0%
Discretion
/Other
1%
97%
<1%
<1%
<1%
<1%
<1%
29%
6%
4%
50%
11%
0%
6%
Disability
13%
Change in Control
5%
Retirement
Percentage of Companies
Prorated
Partial
Full
Acceleration Acceleration Vesting
28%
6%
4%
4%
7%
2%
4%
2%
2%
6%
0%
31%
12%
77%
9%
65%
14%
89%*
1%
30%
27%
* Full vesting at termination date including both single trigger and double trigger as part of a CIC
1%
2%
2%
2%
3%
Disposition of CEO Performance-Based Equity Upon Termination: 2011
Termination Scenario
Forfeiture
Percentage of Companies
Prorated
Partial
Full
Acceleration Acceleration Vesting
Continued
Vesting
Discretion
/Other
With Cause
99%
0%
0%
0%
0%
1%
Without Cause (Excl CIC)
42%
31%
2%
10%
12%
3%
11%
40%
8%
31%
8%
Voluntary
Good Reason (Excl CIC)
Death
Disability
Retirement
Change in Control
96%
31%
15%
18%
5%
3%
41%
41%
33%
22%
0%
2%
7%
13%
3%
0%
14%
0%
12%
23%
11%
66%*
2%
13%
* Full vesting at termination date including both single trigger and double trigger as part of a CIC
18%
1%
0%
2%
3%
5%
2%
12
Disposition of CEO Long-Term Cash Incentives Upon Termination: 2011
Termination Scenario
Forfeiture
Percentage of Companies
Prorated
Partial
Full
Acceleration Acceleration Vesting
Continued
Vesting
Discretion/
Other
With Cause
100%
0%
0%
0%
0%
0%
Without Cause (Excl
CIC)
55%
18%
0%
23%
0%
4%
0%
48%
0%
52%
0%
0%
13%
65%
22%
0%
0%
Voluntary
Good Reason (Excl CIC)
Death
Disability
Retirement
Change in Control
100%
17%
0%
0%
0%
0%
48%
42%
0%
0%
0%
0%
0%
0%
83%
48%
58%*
* Full vesting at termination date including both single trigger and double trigger as part of a CIC
0%
0%
5%
0%
0%
0%
0%
0%
With the shift in long-term incentive mix toward performance shares and performance share units, the
acceleration of this form of equity upon a CIC has a much greater impact on the 280G “parachute” calculation.
According to the 280G rules, Section 24(c) is not applicable to performance-vested equity and cash. In other
words, the full value of the accelerated vesting of performance-based awards is included in the parachute
payment calculation, a condition that can often lead to a 20% excise tax penalty.
In the case of performance-based awards, partial acceleration refers to a portion of the award vesting based
on the number of performance periods completed. Often new grants that have yet to complete a one year
performance period would be forfeited while grants with a least one year completed would vest based on
either target or actual performance. The following is an example from News Corp.:
“…if such termination event occurs within the second or third fiscal year of any applicable
performance period, the full value of any PSU Award is calculated and paid at the end of the
applicable performance period as if no termination occurred.”
“With respect to the PSU Award, in the event of any type of termination that occurs on or
prior to the last day of the first fiscal year of any applicable performance period, the entire
award will be forfeited.”
The Gap uses a similar approach for time-vested awards..
”Upon death, our standard forms of stock option and stock award agreements provide for
accelerated vesting of any unvested shares under awards that have been outstanding for at
least a year, provided that any performance targets have been satisfied.”
13
In a few instances, the performance grant is both prorated and partial as is the case at Pfizer, which has
service conditions designed to exclude current year grants from being accelerated while vesting the
remaining grants on a prorated basis. The following is an example from Pfizer.
“PSAs are prorated at the end of the performance period if the participant is employed
through December 31 of the year of grant. If the retirement takes place prior to the first
anniversary of the grant date, these long-term awards are forfeited.”
O THER B ENEFITS
TERMINATION WITHOUT CAUSE OR FOR GOOD REASON
Fifty-four percent (108 of 200) of companies disclosed that they provide other benefits to executives that are
terminated without cause or for good reason. Most of these companies provide continued health insurance
coverage. Outplacement services are also usually provided in cases where benefits are provided.
% of All Companies
Benefit
CEO
CFO
% of Disclosures
CEO
CFO
# of
Disclosures
(CEO/CFO)
Health Insurance
43.5%
41.5%
83.7%
79.8%
87/83
Additional Pension Credits
2.0%
1.5%
3.8%
2.9%
4/3
Outplacement
Life Insurance
Financial Counseling
22.5%
7.0%
6.5%
26.0%
7.5%
4.5%
CIC F O L L O W E D B Y Q U A L I F Y I N G T E R M I N A T I O N
43.3%
13.5%
12.5%
50.0%
14.4%
8.7%
45/52
13/9
14/15
135 companies (67.5%) disclosed that they provide additional benefits to executives terminated without
cause or for good reason in conjunction with a CIC. .
Ninety-four percent (94%) of companies disclosing benefits and 62% of all companies included the
continuation of health insurance, most often for the number of years that are aligned with the severance
multiple (i.e., two to three years). Also, outplacement is often provided (49%) in cases where CIC benefits
are provided. About 40% of benefit disclosures included the continuation of life insurance and/or additional
pension credits. A small percentage of companies (9.5%) continue making contributions to CEO defined
contribution plans.
14
% of All Companies
CEO
Benefit
CFO
% of Disclosures
CEO
# of
Disclosures
(CEO/CFO)
CFO
Health Insurance
61.0%
62.5%
91.7%
94.0%
122/125
Additional Pension Credits
27.5%
28.0%
41.4%
41.4%
55/55
Outplacement
32.5%
Life Insurance
32.5%
25.5%
Additional Defined
Contribution Yrs
25.0%
8.5%
9.5%
Financial Counseling
8.5%
7.5%
48.9%
48.9%
38.3%
65/65
37.6%
51/50
12.8%
14.3%
12.8%
19/17
11.3%
17/15
E XCISE T AX G ROSS -U PS
As a result of sustained pressure by ISS and other proxy advisors, excise tax gross-ups are disappearing.
Therefore, it is not surprising that just 31% of CEOs (and 21% of other NEOs) are eligible for some type of
gross-up. As recently as four years prior (2007), 83% of CEOs were eligible for either a full gross-up or
modified gross-up. When we examined current policies, 80% of the top 200 companies have a policy to not
provide an excise tax gross-up to CEOs who do not already have an agreement in place. This number
increases to 83% for all other NEOs.
Excise Tax Gross-Up Eligibility: 2011
CEO
Excise Tax Gross-Up
Other NEOs
Current Practice Current Policy Current Practice Current Policy
% with Gross-Up
31%
6%
20%
5%
28%
6%
17%
Allowance
1%
1%
1%
1%
Collar
6%
Note: A Collar is usually set at 5% or 10%, meaning that the company will pay the excise tax if the 280G
amount is 5% or 10% over the 280G threshold or safe harbor amount.
Allowance refers to a fixed dollar amount provided to pay for additional taxes such as the 20% 280G excise
tax.
% with No Gross-Up
Cutback
69%
5%
80%
5%
72%
5%
83%
Best Net
11%
12%
13%
13%
5%
Note: Cutback occurs when the company cuts back all payments to the safe-harbor limit so that no
excise tax is imposed on the individual under any circumstance.
In Best Net (or Valley Provision), the company cuts back payments to the safe-harbor limit only if the
individual would receive a greater after-tax benefit than if the excise tax were paid by the individual on the
excess parachute payments.
15
T ERMINATION S UMMARIES
TERMINATION FOR CAUSE
In most cases, salary and benefits earned or accrued will be paid. But all unvested equity is generally
forfeited, and in many cases vested but unexercised stock options and SARs are cancelled. In most cases, noncancelled, outstanding stock options must be exercised prior to the termination date, or exercised within 90
days or 3 months after the termination date. There are no severance payments or provision of benefits,
including health coverage, following this type of termination.
V O L U N TA R Y T E R M I N A T I O N E X C E P T F O R G O O D R E A S O N
This type of termination is treated similarly to termination for cause. There is no severance or extension of
benefits. Unvested equity is forfeited. However, in most cases the executive retains vested stock options and
SARs and has 90 days or 3 months in which to exercise outstanding awards.
TERMINATION WITHOUT CAUSE
Approximately 64% of companies disclosed that NEOs (including the CEO) are eligible to receive severance
payments and payment of all accrued earnings and benefits. In other cases, there is no severance or provision
of any benefits other than accrued earnings. For CEOs entitled to benefits, severance is most often (32%)
paid at the rate of two times salary plus bonus—usually target bonus. Eleven percent (11%) of CEOs receive
cash benefits based on multiples over two.
Sixty-five percent (65%) of companies pay all or a portion of the current year bonus to the CEO (60% for
other NEOs). This is usually a prorated portion of the target award or actual bonus. Just over half the
companies (52%) provide for either acceleration or continued vesting of equity, while the remaining 48%
require forfeiture. Full acceleration of stock options/SARs and time-vested restricted stock is provided at
approximately one-third of all companies and at about half of all companies not requiring forfeiture. In other
cases, continued vesting is permitted or there is acceleration of a portion of unvested equity.
A slightly lower percentage of performance vested equity is forfeited (42%). Companies that do not cancel
performance awards usually provide vesting on a prorated basis on full period performance (4%), actual
performance through date of termination (21%), or target performance (7%). Ten percent (10%) of
companies pay the performance awards in full based on either target or actual performance for the entire
performance period.
Disposition of CEO Equity Upon Termination Without Cause: 2011
Percentage of Companies
Award Type
Forfeiture
Stock Options
48%
Long-Term Cash
55%
Restricted Stock
Performance Stock
46%
42%
Prorated
Partial
Acceleration Acceleration
Full Vesting
Continued
Vesting
Discretion/
Other
2%
4%
28%
16%
2%
18%
0%
23%
0%
4%
6%
31%
4%
2%
31%
10%
12%
12%
1%
3%
Note: About 37% of companies allow departing executives to exercise outstanding stock options within 90 days or 3
months of the termination date. More generous companies (44%) permit exercises for up to 1 year or more, including
12% allowing exercises up to the term of the option.
16
TERMINATION FOR GOOD REASON
Twenty-six percent (26%) of companies disclosed that NEOs (including the CEO) are eligible to receive
severance payments and payment of all accrued earnings and benefits for good reason termination absent a
change in control. In other cases, there is no severance or provision of any benefits other than accrued
earnings. For CEOs entitled to benefits, severance benefits are usually treated the same as termination
without cause (see above).
However, we did notice that those executives with good reason protection also received more generous
equity acceleration terms, with full vesting of equity more prevalent than is the case for termination without
cause for executives without good reason protection.
TERMINATION DUE TO DEATH
In cases of an executive’s death, companies are usually generous in finalizing payment to the executive’s
estate. And in some cases (10%), additional cash payments are made to the estate such as a multiple of
salary. Using Tesoro Corporation as an example, some companies guarantee a level of cash payments upon
death. Tesoro has an Executive Security Plan, a non-qualified pension plan, which provides as follows:
“The ESP provides for certain death and disability benefits. The death benefits in the ESP are
equal to the greater of (1) the executive’s ESP benefit determined at date of death, (2) the
actuarial equivalent of 400% of the executive’s base pay, prior to the date of death, or (3) the
benefit determined as if the executive had remained an active employee through age 65 and
was paid a benefit at age 65.”
Approximately one-half of companies pay all or part of the current year bonus to the CEO. This payment is
usually pro-rated based on the target level or actual performance. However, 13% of companies pay out a full
year bonus based one either the end-of-year actual calculation, target bonus, or the average paid in the
previous two (or three) years.
Full acceleration of unvested long-term incentives is common in cases of death. For stock options and
restricted stock, 77% of companies fully accelerate vesting. For performance stock, pro-rated or partial
vesting (48%) is most common; however, an additional 31% of companies fully vest performance stock. Ten
Disposition of CEO Equity Upon Termination Due to Death: 2011
Percentage of Companies
Prorated
Partial
Acceleration Acceleration
Discretion/
Other
Award Type*
Forfeiture
Stock Options
11%
1%
3%
77%
7%
1%
Performance Stock
11%
40%
8%
31%
8%
2%
Restricted Stock
Long-Term Cash
6%
0%
4%
48%
2%
0%
Full Vesting
Continued
Vesting
77%
52%
9%
0%
2%
0%
17
TERMINATION DUE TO DISABILITY
Most companies have standard disability programs that cover executives. However, 10% of the top 200 also
provide additional severance payments such as a multiple of salary. Also, 40% of companies pay the current
year bonus, usually on a prorated basis. These additional cash payments can also include executive disability
plans that enable an executive to receive their retirement income early. Here is another example from Tesoro
Corporation:
“If the executive becomes disabled, the executive is entitled to the monthly retirement
benefit for which he is eligible at his normal retirement date, but based upon the service the
participant would have accrued had he remained in active employment until his retirement
date and continued at the same rate of earnings until that date. Assuming that the following
executives became disabled on December 31, 2011, their monthly payments under the ESP
are payable on the first day of the month following the date on which the executive has
attained both age 65 and has a minimum of five years of service.”
Most companies (about 85%) allow either acceleration of unvested equity or continued vesting. Companies
generally provide for at least one year following termination to exercise stock options. About one-third of
companies allow for the full term of the option to exercise. Twenty percent (20%) of companies allow for the
lesser of the option term or five years to exercise. For performance-based equity, 41% of companies provide
for prorated acceleration, with full vesting being next most common.
Disposition of CEO Equity Upon Termination Due to Disability: 2011
Percentage of Companies
Prorated
Partial
Acceleration Acceleration
Discretion/
Other
Forfeiture
Stock Options
16%
1%
3%
64%
15%
1%
Performance Stock
15%
41%
7%
23%
11%
3%
Restricted Stock
Long-Term Cash
13%
0%
4%
48%
2%
0%
Full Vesting
Continued
Vesting
Award Type*
65%
48%
14%
5%
2%
0%
TERMINATION DUE TO RETIREMENT
Only three of 200 companies disclosed cash severance payments to executives upon retirement, which is
understandable since pensions and deferred compensation plans, in addition to accumulated equity, are
usually the foundation for an executive’s retirement. However, in each of these cases they could be more
accurately described as non-competition payments. Nucor is a good example of this type of program.
“Executive Officers have agreed not to compete with Nucor during the 24-month period
following their termination of employment with Nucor for any reason in exchange for
monthly cash payments from the Company during the non-competition period.”
18
Omincom has a unique severance plan that includes termination due to retirement and provides cash
payments for 15 years if all requirements are met.
“The SERCR Plan is unique in its structure and objectives. It is a multi-faceted device that
provides security to Omnicom through the restrictive covenants described below while
delivering a valuable benefit to executives in the form of post-termination compensation.
The SERCR Plan mitigates the need to provide severance benefits to participating executives
as the program provides a guaranteed stream of income following termination provided the
executive fully complies with his obligations.”
“Subject to compliance with the SERCR Plan’s restrictive covenants and consulting
obligation, the annual benefit is payable for 15 years following termination, and is equal to
the lesser of (a) the product of (i) the average of the executive’s three highest years of total
pay (base salary plus bonus and other incentive compensation), and (ii) a percentage equal
to 5% plus 2% for every year of the executive’s service as an executive officer to Omnicom,
not to exceed 35% and (b) $1.5 million, subject to an annual cost-of-living adjustment.
Payment of this annual benefit begins on the later of (a) attainment of age 55, or (b) the year
following the calendar year in which the termination of employment occurred, with certain
exceptions. In the event of death subsequent to satisfaction of the seven-year service
requirement, beneficiaries of the executive are entitled to the annual benefit payments. No
annual benefit is payable if the executive is terminated by Omnicom for Cause.”
The final case which covers retirement comes from Travelers Companies, Inc.
“Under the Non-Competition Agreement, if the Company elects to impose a six-month noncompete period and the executive complies with such obligations, the executive will be
entitled to receive a lump sum payment at the end of the period equal to the sum of (a) six
months base salary plus (b) 50% of the executive’s average annual bonus for the prior two
years plus (c) 50% of the aggregate grant date fair value of the executive’s average annual
equity awards for the prior two years.”
Regarding unvested equity at the time of retirement, stock options and restricted stock are split
somewhat evenly between full acceleration, continued vesting, and forfeiture. Performance stock
most often continues to vest (18%), followed by prorated vesting based on final results (14%) and
actual results at termination (13%). Long-term cash vesting is usually accelerated pro-rata (65%) or
in full (22%). For non-CEOs, full acceleration was higher (35%) and pro-rata slightly lower (59%)
with fewer forfeiture cases (6% vs. 13% for CEOs).
Disposition of CEO Equity Upon Termination Due to Retirement: 2011
Percentage of Companies
Award Type*
Forfeiture
Stock Options
28%
Long-Term Cash
13%
Restricted Stock
Performance Stock
28%
18%
Prorated
Partial
Acceleration Acceleration
3%
7%
33%
65%
Full Vesting
Continued
Vesting
Discretion/
Other
5%
32%
30%
2%
0%
22%
0%
0%
6%
13%
30%
13%
27%
18%
3%
5%
19
TERMINATION RESULTING FROM A CHANGE IN CONTROL
Our study shows that 79% of companies provide severance benefits usually with extended benefits for NEOs
terminated in relation to CIC situations. Accelerated vesting of long-term incentives is nearly universal if the
executive is terminated due to a CIC. Severance usually includes payments based on a multiple of salary and
bonus, a portion of the current year bonus, full acceleration of long-term incentives, and in increasingly rare
cases, a gross-up of excise taxes.
Fifty-five percent (55%) of the top 200 companies disclose that executives receive at least a portion of their
current year bonus, most commonly based on target performance. Of these companies, 76% pay a pro-rated
portion of the bonus whereas only 16% pay the full amount.
Over ninety percent of companies allow unvested equity to accelerate upon terminations related to a CIC. A
handful of the largest companies, however, do not automatically accelerate equity, such as Apple, Boeing,
Chevron, Exxon Mobil, IBM, Johnson & Johnson, and Microsoft.
In the majority of cases where equity accelerates, full acceleration is common for an NEO termination. For
stock options and restricted stock, approximately 90% of companies fully accelerate vesting. For performance
stock, 66% of companies have full acceleration with 44% vesting at target, 15% vesting based on actual
performance at the time of the CIC, and 6% based on the greater of target or actual. Pro-rated or partial
vesting applies in 25% of companies with equity acceleration. Only 5% of companies require forfeiture of
equity.
C ONCLUSIONS
Severance practices continue to be influenced by investor concerns (as articulated by ISS and Glass Lewis),
IRS rule changes (e.g. IRS Code 409A, proxy disclosure changes (CD&A presentation), the initiation of Say on
Pay (Dodd-Frank)), and economic conditions (most notable strong criticism by union groups (e.g. AFL-CIO
Pay Watch commentary)).
The trend is for CEOs to be paid less cash and stock upon termination with or without a change-in-control.
The push for less severance was initiated by shareholder concern and assisted by the SEC when it was
required that every company explain the role of severance as an element of compensation. Shareholders
questioned the 280G gross-up provision and voted “No” on Say on Pay for those companies who had such
gross-ups. The IRS then required that performance conditions be met for performance based plans that are
part of severance payments (excluding CIC, death and disability) in order for the awards to be considered taxdeductible under IRS Code Section 162(m). This performance requirement includes companies that are
qualifying their restricted stock awards under an umbrella plan (also known as an outside plan).
20
A PPENDIX 1
S&P 500 L ARGE C AP C OMPANIES – T OP 200
3M CO
ABBOTT LABORATORIES
AES CORP
AETNA INC
AFLAC INC
ALCOA INC
ALLSTATE CORP
ALTRIA GROUP INC
AMAZON.COM INC
AMERICAN ELECTRIC POWER CO
AMERICAN EXPRESS CO
AMERISOURCEBERGEN CORP
AMGEN INC
ANADARKO PETROLEUM CORP
APACHE CORP
APPLE INC
ARCHER-DANIELS-MIDLAND CO
AT&T INC
AUTONATION INC
BAKER HUGHES INC
BANK OF AMERICA CORP
BANK OF NEW YORK MELLON CORP
BAXTER INTERNATIONAL INC
BEST BUY CO INC
BOEING CO
BRISTOL-MYERS SQUIBB CO
CAPITAL ONE FINANCIAL CORP
CARDINAL HEALTH INC
CARNIVAL CORP/PLC (USA)
CATERPILLAR INC
CBS CORP
CENTERPOINT ENERGY INC
CHESAPEAKE ENERGY CORP
CHEVRON CORP
CHUBB CORP
CIGNA CORP
CISCO SYSTEMS INC
CITIGROUP INC
COCA-COLA CO
COCA-COLA ENTERPRISES INC
COLGATE-PALMOLIVE CO
COMCAST CORP
COMPUTER SCIENCES CORP
CONAGRA FOODS INC
CONOCOPHILLIPS
CONSOLIDATED EDISON INC
CONSTELLATION ENERGY GRP INC
COSTCO WHOLESALE CORP
COVENTRY HEALTH CARE INC
CSX CORP
CUMMINS INC
CVS CAREMARK CORP
DANAHER CORP
DEAN FOODS CO
DEERE & CO
DELL INC
DELTA AIR LINES INC
DEVON ENERGY CORP
DIRECTV GROUP INC
DISNEY (WALT) CO
DOMINION RESOURCES INC
DONNELLEY (R R) & SONS CO
DOW CHEMICAL
DU PONT (E I) DE NEMOURS
DUKE ENERGY CORP
EATON CORP
EDISON INTERNATIONAL
EMC CORP
EMERSON ELECTRIC CO
ENTERGY CORP
EXELON CORP
EXPRESS SCRIPTS INC
EXXON MOBIL CORP
FEDEX CORP
FIRSTENERGY CORP
FLUOR CORP
FORD MOTOR CO
FREEPORT-MCMORAN COP&GOLD
GAP INC
GENERAL DYNAMICS CORP
GENERAL ELECTRIC CO
GENERAL MILLS INC
GENERAL MOTORS
GILEAD SCIENCES INC
GOLDMAN SACHS GROUP INC
GOODYEAR TIRE & RUBBER CO
GOOGLE INC
HALLIBURTON CO
HESS CORP
HEWLETT-PACKARD CO
HOME DEPOT INC
HONEYWELL INTERNATIONAL INC
HUMANA INC
ILLINOIS TOOL WORKS
INGERSOLL-RAND CO LTD
INGRAM MICRO INC
INTEGRYS ENERGY GROUP INC
INTEL CORP
INTL BUSINESS MACHINES CORP
INTL FCSTONE INC
INTL PAPER CO
ITT CORP
JABIL CIRCUIT INC
JACOBS ENGINEERING GROUP INC
JOHNSON & JOHNSON
JOHNSON CONTROLS INC
JPMORGAN CHASE & CO
KELLOGG CO
KIMBERLY-CLARK CORP
KOHL'S CORP
KRAFT FOODS INC
KROGER CO
L-3 COMMUNICATIONS HLDGS INC
LILLY (ELI) & CO
LOCKHEED MARTIN CORP
LOEWS CORP
LOWE'S COMPANIES INC
MACY'S INC
MARATHON OIL CORP
MARRIOTT INTL INC
MARSH & MCLENNAN COS
MASTERCARD
MCDONALD'S CORP
MCKESSON CORP
MEDTRONIC INC
MERCK & CO
METLIFE INC
MICROSOFT CORP
METLIFE INC
21
S&P 500 L ARGE C AP C OMPANIES – T OP 200
MONSANTO CO
MORGAN STANLEY
MOTOROLA SOLUTIONS INC
MURPHY OIL CORP
NATIONAL OILWELL VARCO INC
NEWS CORP
NEXTERA ENERGY INC
NIKE INC
NORFOLK SOUTHERN CORP
NORTHROP GRUMMAN CORP
NUCOR CORP
OCCIDENTAL PETROLEUM CORP
OFFICE DEPOT INC
OMNICOM GROUP
ORACLE CORP
PACCAR INC
PARKER-HANNIFIN CORP
PENNEY (J C) CO
PEPSICO INC
PFIZER INC
PG&E CORP
PHILIP MORRIS INTERNATIONAL
PLAINS ALL AMERICAN PIPELINE
PPG INDUSTRIES INC
PROCTER & GAMBLE CO
PROGRESSIVE CORP
PRUDENTIAL FINANCIAL INC
PUBLIC SERVICE ENTERPRISE GRP INC
QUALCOMM INC
RAYTHEON CO
SAFEWAY INC
SARA LEE CORP
SCHLUMBERGER LTD
SEARS HOLDINGS CORP
SOUTHERN CO
SPRINT NEXTEL CORP
STAPLES INC
STATE STREET CORP
SUNOCO INC
SUNTRUST BANKS INC
SUPERVALU INC
SYSCO CORP
TARGET CORP
TESORO CORP
TE CONNECTIVITY LTD
TEXAS INSTRUMENTS INC
TEXTRON INC
TIME WARNER CABLE INC
TIME WARNER INC
TJX COMPANIES INC
TRAVELERS COS INC
TYSON FOODS INC
U S BANCORP
UNION PACIFIC CORP
UNITED PARCEL SERVICE INC
UNITED STATES STEEL CORP
UNITED TECHNOLOGIES CORP
UNITEDHEALTH GROUP INC
VALERO ENERGY CORP
VERIZON COMMUNICATIONS INC
VIACOM INC
WALGREEN CO
WAL-MART STORES INC
WASTE MANAGEMENT INC
WELLPOINT INC
WELLS FARGO & CO
WHIRLPOOL CORP
WILLIAMS COS INC
XCEL ENERGY INC
XEROX CORP
YUM BRANDS INC
22
A PPENDIX 2
S UMMARY
OF
T OP 200 C OMPANIES
BY I NDUSTRY
Global Industrial Classification Sector (GICS)
Capital Goods
Energy
Utilities
Retailing
Food Beverage & Tobacco
Health Care Equipment & Services
Technology Hardware & Equipment
Diversified Financials
Insurance
Materials
Media
Food & Staples Retailing
Pharmaceuticals, Biotechnology & Life Sciences
Transportation
Software & Services
Automobiles & Components
Consumer Services
Telecommunication Services
Banks
Household & Personal Products
Commercial Services & Supplies
Consumer Durables & Apparel
Semiconductors & Semiconductor Equipment
C ODE
Percentage of Companies
12.0%
10.0%
8.5%
7.0%
6.5%
6.0%
6.0%
5.0%
4.5%
4.5%
4.5%
4.0%
4.0%
3.0%
2.5%
2.0%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
1.0%
23
A BOUT J AMES F. R EDA & A SSOCIATES
A
D IVISION OF G ALLAGHER B ENEFIT S ERVICES , I NC .
James F. Reda & Associates, a Division of Gallagher Benefit Services, Inc., is a nationally-recognized executive
compensation and corporate governance consulting firm. Headquartered in New York, New York with a
satellite office in Atlanta, Georgia, our principal consultants have over 75 years of combined experience in
compensation consulting. Our consultants are quoted frequently in leading media publications such as
Business Week, Forbes, Fortune, The New York Times, and The Wall Street Journal.
Our firm has extensive experience in the areas of equity awards, compensation committee advisory services,
incentive programs of all kinds, and the performance evaluation and goal-setting process. We work with
clients from the following industries: financial services, health-care, life-science, technology, retail, and
manufacturing. We have substantial experience working with private companies.
James Reda has close to 26 years of experience in the field and has authored two books on the subject of
executive compensation and the role of the compensation committee, entitled Pay to Win: How America’s
Successful Companies Pay Their Executives (Harcourt: 2000) and The Compensation Committee Handbook
(John Wiley: 2007), the fourth edition will be available in 2012. Mr. Reda served as a commissioner on the
Task Force “Executive Compensation and the Role of the Compensation Committee,” assembled by the
National Association of Corporate Directors. In addition, he served on the Conference Board Task Force on
Executive Compensation. Mr. Reda is also a member of a task force created by the pre-eminent trade group,
the National Association of Stock Plan Professionals, in order to rationalize executive compensation.
Our Services Include:
•
•
•
•
•
•
•
•
•
•
•
•
Advising compensation committees on all executive compensation matters
Providing corporate governance advice with respect to executive and board compensation
Benchmarking total compensation, including: base salary, short-term incentives, long-term
incentives, executive benefits and perquisites
Assisting with all aspects of short- and long-term incentive plan design, including: tax, accounting,
and SEC implications of such arrangements
Working with companies to determine competitive employment agreement plan designs
Providing expert witness testimony, opinion, and litigation support
Evaluating CEO, other senior executives and boards and committees
Providing assumption analysis and expense calculation for FASB ASC Topic 718 purposes
Designing executive ownership guidelines and capital accumulation programs
Reviewing special situation incentives associated with IPOs, business units, partnerships, distressed
companies, and mergers & acquisitions
Designing deferred compensation, supplemental executive retirement programs (SERPs) and other
executive perquisite and benefit programs
Designing change-in-control and severance programs
24