Large companies have made golden parachutes — severance paid to executives affected by a change in control — “more shareholder friendly” in reaction to shareholder pressure, said a new Towers Watson report.
Some 95% of companies “have modified their parachute arrangements to require both a (change-in-control) and corresponding termination of employment by the company before (severance) payments are triggered” for CEOs and other top executives as of 2014, the report said. In 2010, 85% of companies required such a double trigger for CEOs and 84% of companies for other top executives.
“The involuntary termination must take place within a specified length of time … typically two years following” the change-in-control event, wrote Cody Nelson, executive compensation analyst and author of the report.
Severance multiples have declined, which are used to determine the payout and are based on the compensation components in payout formula.
As of 2014, 36% of CEOs received a three-times multiple, down from 67% in 2010, while 26% of CEOs received a two-times multiple, up from 15% over the same period.
For other top executives, 26% received a three-times multiple in 2014, down from 37% in 2010, while 49% received a two-times multiple, up from 27%.
Among other findings, eligibility for additional retirement benefits as part of golden parachutes “has declined substantially … in part because fewer executives participate in defined benefit pension programs,” the report said. As of 2014, 36% of CEOs and 33% of other top executives received additional retirement credits, a 12- and 15-percentage-point drop, respectively, since 2010, the report said.
However, “golden parachutes are still very much a part of the executive compensation landscape,” Mr. Nelson wrote in the report.
“Companies will continue to balance the need to incent executives to act in the company's interest in pursuing attractive merger opportunities with the need to be responsive to shareholders and minimize unwarranted severance costs.”
The report examined the 340 Fortune 500 companies that offer severance upon a change in control.
