Published on: February 27, 2021
Topics: Severance and Change in Control
While change-in-control (CIC) or severance benefits are nearly universally used, some shifts are apparent in their administration and specific vesting structures, according to a new survey from Meridian Compensation Partners.
The survey reviewed the publicly disclosed severance benefits for CEOs and NEOs at 200 companies within the S&P 500 Index across multiple industries. Highlights include:
- The typical CIC arrangements cover a company’s CEO and direct reports.
- Limited to between 5 and 20 executives.
- 76% of companies provide for the payment of the bonus if the departure is mid-year.
- 95% of those companies pay the bonus on a pro rata basis (typically based on target).
- 71% of companies continue health care benefits for a defined period.
- 22% of companies pay a lump sum amount, in lieu of continuation of health care benefits.
- Double-trigger vesting requirements for stock have risen about 15% in prevalence since 2017 – from 80% to 95%.
- Vesting performance-based awards at target remains the most common provision (42%), but the survey notes this level is declining.
- An emerging practice is to vest performance share awards based on the greater of actual performance or target (27%).
- 20% of companies now pro-rate the payout of performance-based equity.
- 62% of companies include a restrictive covenant in CIC agreements.
The survey found an increase in the use of a single severance plan for all executives, rather than maintaining individual agreements. Equity plans or award agreements that provide CIC benefits (e.g., vesting) typically cover all plan participants. Further, only a small minority of companies maintain an excise tax gross-up benefit. Rather, companies use a “best net” provision regarding potential taxes on the severance benefits.
As we highlighted in a recent article, after a sharp decline as the COVID-19 pandemic hit, the number of CEO departures is expected to increase again through 2021. Severance benefits could once again draw the attention of legislators and regulators, especially if returns to pre-COVID employment levels are slow to materialize.
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