As shareholders and advisory groups continue to put pressure on executive compensation, the number of executives entitled to excise tax gross-ups and other benefits in the event of a change in control is declining, according to a new Alvarez & Marsal Taxand study.  The report, which is available for download at http://www.alvarezandmarsal.com/executive-change-control-report-20132014, examined arrangements among the top 200 publicly traded companies in the U.S. 
While the average value of change in control benefits for CEOs remained relatively flat from roughly $30.2 million in 2011 to $29.9 million in 2013, the study revealed notable changes in equity plans, cash severance multiples and excise tax gross-up payments – signalling a downshift in payouts and an evolving mindset among boards and compensation committees.
“Regulatory changes and the influence of shareholders and advisory groups have dramatically increased transparency, while decreasing value of change in control severance and excise tax gross-ups,” said Brian Cumberland, Managing Director with Alvarez & Marsal Taxand and head of its Compensation and Benefits practice.  “As companies increasingly recognize they are going to have to stand behind their numbers, boards and compensation committees are taking a hard look at the executive benefits they provide to avoid any perception of excess or the diminishing of shareholder value.” 
A major trend impacting change in control arrangements is the move toward “at will” employment for executives and the decline of employment agreements.  The study showed that 22 percent of CEOs are not entitled to severance payments under any circumstances and 44 percent are not entitled to severance upon a termination not in connection with a change in control – both of which are surprisingly high percentages.
Another notable finding: the number of executives entitled to excise tax gross-ups (payments provided by a company to make an executive “whole” by covering tax liability related to change in control payments) continues to drop.  Among CEOs, entitlements to gross-ups or modified gross-ups declined significantly from 61 percent in 2009 to 30 percent in 2013.  Furthermore, 60 percent of companies that currently provide an excise tax gross-up or modified gross-up indicated they intend to phase out or completely eliminate excise tax gross-ups in the future.
The study also revealed a significant shift in the vesting of equity upon a change in control, from vesting upon a “single trigger,” which only requires a change in control, to a “double trigger,” which requires a change in control and termination of employment.  Most equity arrangements – 85 percent of the companies reviewed in 2013 – vest upon a “single trigger.”  However, many more companies are moving to a “double trigger,” with 63 percent of companies in 2013 having at least one equity plan that provides for “double trigger” vesting, compared to 28 percent of companies studied in 2009.  This can, in part, be explained by the fact that equity plans are typically put into place for 10 years; any new plans being created are generally “double trigger.” 
Other notable findings include:
·         Decrease in severance multiples.  The most common cash severance multiple for CEOs is between two and three times compensation (43 percent). The prevalence of a three times multiple has fallen to 42 percent in 2013 from 51 percent in 2011.
·         Fewer enhancements in retirement benefits. The percentage of companies that provide at least one executive with an enhancement in retirement benefits decreased to 46 percent in 2013 compared to 52 percent in 2011.
·         Long-term incentive payments. The benefit with the largest increase in value was long-term incentive payments which, for CEOs, went from $18 million in 2011 to $20 million in 2013.  This is largely driven by fluctuations in the stock market.
·         Industries with the largest and lowest benefits. The consumer discretionary industry has the largest average benefit of $43.9 million for CEOs, while the telecommunications industry offers the lowest average benefit of $17.5 million for CEOs.
The study, which was conducted to understand current pay practices and to analyze their transparency, examined the 200 largest public companies in 10 different industries based on market capitalization. The study was also performed in 2006, 2007, 2009 and 2011.
About Alvarez & Marsal Taxand
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.
About Alvarez & Marsal
Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to activate change.
Privately-held since 1983, A&M is a leading global professional services firm that delivers performance improvement, turnaround management and business advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action.  Our senior professionals are experienced operators, world-class consultants and industry veterans who draw upon the firm's restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage.
When action matters, find us at alvarezandmarsal.com
Follow A&M on Facebook, LinkedIn and Twitter.

Sub Title: 
Shareholder Pressures Limiting Severance Payments in Change in Control Situations; Excise Tax ‘Gross Up’ Entitlements Lowest in Years
News Date: 
Monday, March 10, 2014

‘Golden Parachute’ Benefits Provided to Executives Declining, According to New Report by Alvarez & Marsal

March 10, 2014

Shareholder Pressures Limiting Severance Payments in Change in Control Situations; Excise Tax ‘Gross Up’ Entitlements Lowest in Years

As shareholders and advisory groups continue to put pressure on executive compensation, the number of executives entitled to excise tax gross-ups and other benefits in the event of a change in control is declining, according to a new Alvarez & Marsal Taxand study.  The report, which is available for download at http://www.alvarezandmarsal.com/executive-change-control-report-20132014, examined arrangements among the top 200 publicly traded companies in the U.S. 

While the average value of change in control benefits for CEOs remained relatively flat from roughly $30.2 million in 2011 to $29.9 million in 2013, the study revealed notable changes in equity plans, cash severance multiples and excise tax gross-up payments – signalling a downshift in payouts and an evolving mindset among boards and compensation committees.

“Regulatory changes and the influence of shareholders and advisory groups have dramatically increased transparency, while decreasing value of change in control severance and excise tax gross-ups,” said Brian Cumberland, Managing Director with Alvarez & Marsal Taxand and head of its Compensation and Benefits practice.  “As companies increasingly recognize they are going to have to stand behind their numbers, boards and compensation committees are taking a hard look at the executive benefits they provide to avoid any perception of excess or the diminishing of shareholder value.” 

A major trend impacting change in control arrangements is the move toward “at will” employment for executives and the decline of employment agreements.  The study showed that 22 percent of CEOs are not entitled to severance payments under any circumstances and 44 percent are not entitled to severance upon a termination not in connection with a change in control – both of which are surprisingly high percentages.

Another notable finding: the number of executives entitled to excise tax gross-ups (payments provided by a company to make an executive “whole” by covering tax liability related to change in control payments) continues to drop.  Among CEOs, entitlements to gross-ups or modified gross-ups declined significantly from 61 percent in 2009 to 30 percent in 2013.  Furthermore, 60 percent of companies that currently provide an excise tax gross-up or modified gross-up indicated they intend to phase out or completely eliminate excise tax gross-ups in the future.

The study also revealed a significant shift in the vesting of equity upon a change in control, from vesting upon a “single trigger,” which only requires a change in control, to a “double trigger,” which requires a change in control and termination of employment.  Most equity arrangements – 85 percent of the companies reviewed in 2013 – vest upon a “single trigger.”  However, many more companies are moving to a “double trigger,” with 63 percent of companies in 2013 having at least one equity plan that provides for “double trigger” vesting, compared to 28 percent of companies studied in 2009.  This can, in part, be explained by the fact that equity plans are typically put into place for 10 years; any new plans being created are generally “double trigger.” 

Other notable findings include:

·         Decrease in severance multiples.  The most common cash severance multiple for CEOs is between two and three times compensation (43 percent). The prevalence of a three times multiple has fallen to 42 percent in 2013 from 51 percent in 2011.

·         Fewer enhancements in retirement benefits. The percentage of companies that provide at least one executive with an enhancement in retirement benefits decreased to 46 percent in 2013 compared to 52 percent in 2011.

·         Long-term incentive payments. The benefit with the largest increase in value was long-term incentive payments which, for CEOs, went from $18 million in 2011 to $20 million in 2013.  This is largely driven by fluctuations in the stock market.

·         Industries with the largest and lowest benefits. The consumer discretionary industry has the largest average benefit of $43.9 million for CEOs, while the telecommunications industry offers the lowest average benefit of $17.5 million for CEOs.

The study, which was conducted to understand current pay practices and to analyze their transparency, examined the 200 largest public companies in 10 different industries based on market capitalization. The study was also performed in 2006, 2007, 2009 and 2011.

About Alvarez & Marsal Taxand

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.

About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) when conventional approaches are not enough to activate change.

Privately-held since 1983, A&M is a leading global professional services firm that delivers performance improvement, turnaround management and business advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action.  Our senior professionals are experienced operators, world-class consultants and industry veterans who draw upon the firm's restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage.

When action matters, find us at alvarezandmarsal.com

Follow A&M on Facebook, LinkedIn and Twitter.