|New York, NY, January 09, 2012 – The average change in control benefit provided to CEOs has increased 32 percent over the past two years, rising to $30.2 million in 2011 from $22.9 million in 2009, according to a new study by Alvarez & Marsal Taxand, the tax advisory affiliate of leading global professional services firm Alvarez & Marsal. The study, which analyzed current change in control arrangements among the top 200 publicly traded U.S. companies, revealed the increase was driven primarily by equity-based payouts and tied to a company’s performance.
“Pressure from shareholder groups is continuing to drive more performance-based compensation, such as equity-based compensation, and fewer gross-up payments, which cover the full amount of any excise tax imposed upon the executive in a change in control situation,” said Brian Cumberland, a managing director with Alvarez & Marsal Taxand and national practice leader of its Compensation and Benefits practice. “These findings demonstrate both a shift in what’s expected from senior management, and a direct correlation between corporate performance and CEO rewards.”
Similar to 2009, 78 percent of CEOs and 80 percent of other named executive officers (NEOs) are entitled to receive a cash severance payment upon termination in connection with a change in control. While cash severance payments for CEOs account for more than 25 percent of average change in control benefits received, a majority (59.4%) are long-term incentive benefits, such as restricted stock/options, that are tied to performance.
Of the 200 companies reviewed, 99 percent provide some type of change in control protection, of which the vast majority (96%) had protection under equity plans. Agreements and retirement/deferred compensation plans trail behind at 64 percent and 49 percent.
“We’ve seen an increase in reluctance from shareholders to pay out CEOs upon a change in control without termination of employment,” adds Mr. Cumberland. “This has led to a significant increase in double-trigger vesting – meaning another event must occur in accompaniment with a change in control for equity to vest – with 53 percent of companies in 2011 offering at least one plan that provides for double-trigger vesting, up from only 28 percent in 2009. However, single-trigger vesting is still the primary practice to vest equity upon a change in control.”
Similarly, survey findings show companies are approaching excise tax protection with more caution. Only 49 percent of CEOs have excise tax gross-up or modified gross-up protection, compared with 61 percent in 2009 and 66 percent in 2007. Of the companies that provide an excise tax gross-up, more than half (51%) have indicated they intend to phase out or completely eliminate tax gross-up payments in the future.
The study also analyzed changes across different industry sectors. Findings include:
“As the business environment undergoes transformations to support greater transparency across corporate practices, we are bound to experience variations that sometimes may seem counterintuitive. In this economy, one would have expected parachute payments to decline, as did general wages, however, given that the majority of compensation is vested over the long-term, fluctuating stock prices account for the increase. As we move into 2012, I believe we will see some fundamental changes to compensation norms, and with it, a renewed sense of accountability and transparency.”
- The consumer discretionary industry has the largest average change in control benefit of $46.1 million while the telecommunications industry has the lowest average benefit of $15.9 million
- 95% of companies in healthcare, materials and utilities industries provide a cash severance benefit, yet only 55% of companies in the financial services and information technology industries do
- 80% of companies that provide excise tax gross-ups in the information technology industry have publicly disclosed their intention to phase out or eliminate excise tax gross-ups in the future, compared to only 29% of financial services companies.
About Alvarez & Marsal Taxand, LLC
Alvarez & Marsal Taxand, LLC, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M’s commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.
Alvarez & Marsal Taxand is a founder of Taxand, the world’s largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.
To learn more, visit www.alvarezandmarsal.com or www.taxand.com.