Cash Severance Still King in a Change-in-Control, Finds Study

CIC cash severance is still higher than severance paid outside a change-in-control, according to FW Cook’s 2023 practices survey. The report is a comprehensive review of market severance practices for CEOs and CFOs (who often represent the rest of the C-Suite in terms of severance treatment).

Why it matters: Executive compensation shareholder proposals went up 108% this year, largely driven by severance proposals (see this Gibson-Dunn report for details). The proposals typically require shareholder approval of any severance over 2.99x base and bonus.

By the numbers: The survey is extensive and reports on five-year trends from 2016 to 2023. Key highlights include:

Cash Severance 

• Most companies provide CEO severance for a CIC (85%) or non-CIC separation (74%).
  
  
• Multiple of salary and bonus is the most common approach for CIC (87%), but drops to 63% for non-CIC, with 37% of respondents reporting they use salary only.
  
  
• CEO cash severance multiples are typically 2x or 3x pay, with 2x more common in non-CIC.

Equity Treatment

• 90% of companies reported they fully accelerate time-based awards for a CIC, and 70% accelerate performance awards. In a non-CIC, only 10% reported accelerating outstanding equity with about 55% forfeiting unvested awards.

Benefits

• For a CIC, two years of health and welfare benefits continuation is the most common; for a non-CIC, practice is split between 1.5 years and 2.0 for 70% of companies.

Excise Tax Gross-ups

• In an area heavily scrutinized by investors, more companies have adopted a best-net approach to address potential excise tax created due to the severance payment (54% prevalence versus 35% in 2016).

Restrictive Covenants

• 45% of companies use restrictive covenants (non-compete, non-solicit) in conjunction with CIC severance awards. The most common duration for non-competes is 1 year (50%) or 2 years (34%). The same is true for non-solicits (41% and 45% respectively).