Single Trigger Vesting Doesn’t Land Well in Golden Parachutes

Nearly 35% of U.S. companies received an “against” Say on Golden Parachute vote recommendation from ISS in 2022, which is an increase from 28.7% the previous year, according to its 2022 US Benchmarking Policy Report. The ISS study reviewed CEO golden parachute values along with equity award practices to determine the key factors that led to failure votes – and single trigger vesting tops the list as most problematic for investors.

Public companies are required to disclose in the proxy an estimation of the total compensation to be awarded to named executive officers as a result of a change-in-control event. The values must accompany disclosure of how severance payouts will be calculated, equity vesting treatment and other award provisions. While recent years have not shown significant increases in the median CEO parachute values, 2022 data indicated an astounding 62% year-over-year jump rising from $7.9 million to $12.9 million. ISS signaled that investors “appear to be mindful of the total golden parachute magnitude and may be voting against golden parachute proposals on this basis” citing that the failure rate increased to 15.6% from 11.8% in conjunction with higher than median values. The increase in CEO parachute value is largely due to significant outstanding equity values and the substantial portion that equity incentives represent within a CEO’s overall compensation.

A single-trigger equity acceleration clause occurs when severance payments and /or accelerated equity vesting happens automatically upon a change of control (without termination of employment). This practice was prevalent in 70% of failed votes, up from 57%. However, ISS noted that in most cases, the company also had other “concerning” parachute practices. Over recent years, most companies have moved to double-trigger acceleration clauses which require that the executive is involuntarily terminated before payments are made.

The second most frequently cited area of concern was related to the acceleration and payout of above-target performance shares with lack of rationale. ISS also considers the use of excise tax gross ups and special retention awards that are too large and paid on a single-trigger basis to be in opposition to shareholder interests and factors that will result in an “against” vote recommendation.

Change-in-control policies should be reviewed regularly and in conjunction with due diligence around M&A activity. The Center has previously highlighted Mayer Brown's primer on best practices for corporate transactions. Additionally, a 2022 Alvarez & Marsal / Equilar Executive Change in Control survey offers benchmarking practices for severance, long-term incentives, excise tax protection and other benefits for the CEO and CFO at the top 200 companies.