New York, NY – As shareholders and advisory groups continue to scrutinize 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 on A&M’s website, 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 $29.9 million in 2013 to $30.3 million in 2015, the study revealed changes in equity plans, cash severance multiples and excise tax gross-up payments. These findings highlight a continued downward trend in pay-outs amid rising concerns regarding corporate governance.
There are strategic reasons for management and compensation committees to provide executive parachute payments; however, change in control arrangements continue to face increased scrutiny,” said Brian Cumberland, Managing Director with Alvarez & Marsal Taxand and head of its Compensation and Benefits Practice. “By benchmarking and evaluating these arrangements, boards and their compensation committees can demonstrate accountability and show that they are acting within the spirit of the SEC’s regulations and guidance.”
A major trend impacting change in control arrangements is the move toward performance-based long-term incentives that comprise a large portion of the change in control benefits to which CEOs and Other NEOs are entitled. The 2016 Change In Control Report, through analysing available information in the companies’ proxy statements, found approximately half of the long-term incentives are subject to time-based vesting as the other half are subject to performance-based vesting.
Another notable finding is the number of executives entitled to excise tax gross-up payments – provided by a company to make an executive “whole” by covering tax liability related to change in control payments – continues to drop. Seventeen percent of CEOs and 21 percent of Other NEOs (Named Executive Officers) are entitled to receive gross-up payments. Compared to 2013, this is a reduction from 30 percent for CEOs and Other NEOs. In fact, 93 percent of companies that currently provide an excise tax gross-up or modified gross-up payment have indicated that they indent to phase out or completely eliminate excise gross-up payments in the future.
The study also revealed that 82 percent of companies in 2015 have unvested equity awards with a “double trigger”, change in control and termination of employment, up from 63 percent in 2013 and 53 percent in 2011.
Other findings include:
- Decrease in severance multiples. The most common cash severance multiple for CEOs is between two and three times compensation (46 percent). The prevalence of a three times or higher multiple has fallen to 37 percent in 2015 from 42 percent in 2013.
- Cash severance payment conditions. Similar to 2013, 78 percent of CEOs and 77 percent of Other NEOs are entitled to receive a cash severance payment upon termination on connection with a change in control. However, upon a termination not in connection with a change in control, only 55 percent of CEOs and Other NEOs are entitled to a cash severance payment.
- Industries with the largest and lowest benefits. The information technology industry has the largest average benefit of $40.9 million, whereas the telecommunications industry offers the lowest average benefit of $13.4 million.
The study, which was conducted to understand current pay practices and to analyze their transparency, examined the 20 largest public companies in 10 different industries based on market capitalization. The study was also performed in 2006, 2007, 2009, 2011 and 2013.
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.
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