Report Scope and Study Group Characteristics
Meridian’s 2023 Study of Executive Change-in-Control Arrangements (“2023 Study”) provides current information and data on Change-in-Control (CIC) severance practices at constituent companies (“Study Group”) of Standard & Poor’s 500® Index (“S&P 500®”). For information on severance benefits payable outside the context of a CIC, please refer to Meridian’s 2021 Study of Executive Severance Arrangements Not Related to a Change-in-Control.
Study Group Characteristics
The table below provides revenue and market capitalization statistics for the Study Group.
Report Scope
The 2023 Study reports on the prevalence of executive CIC severance arrangements that cover named executive officers (“NEOs”). In addition, the 2023 Study reports on the prevalence of the following types of executive severance benefits payable to NEOs in connection with a CIC:
• Cash severance benefits.
• Payment of current year bonus/annual incentive.
• Continuation of health care benefits.
• Vesting and settlement of equity awards.
• Approach for addressing the potential imposition of golden parachute excise tax.
The 2023 Study also reports on the types of qualifying events that trigger the payment of CIC benefits.
Importantly, the 2023 Study does not: (i) report on benefits that may be payable to an NEO upon a termination of employment not in connection with a CIC; or (ii) capture potential enhancements in, or modifications to, severance benefits that may be negotiated upon actual termination of employment in connection with a corporate transaction.
Development of Study Group Statistics
We developed Study Group statistics through data and information primarily derived from Main Data Group.
Unless otherwise indicated, the 2023 Study shows aggregated prevalence statistics relating to Survey Companies’ chief executive officers (“CEO”) and Chief Financial Officers (“CFO”), which based on our experience serves as an effective proxy for each of the other Named Executive Officers.
Overview of Change-in-Control (CIC) Arrangements
CIC arrangements are a common practice among large public companies. Typically, these arrangements cover a company’s executive officers and provide, at a minimum, cash severance benefits upon a triggering event. However, many public companies cover a broader range of executives. Other frequently provided CIC-related benefits include continuation of health care benefits, payment of current year bonus, enhancement to retirement benefits and outplacement services. The payment of these benefits and cash severance are nearly universally triggered upon an executive officer’s qualifying termination of employment (i.e., termination without “cause” or termination for “good reason”) that occurs within a specified period (typically 24 months) following a CIC (i.e., “double trigger”).
Generally, CIC arrangements (or award agreements and equity plans) provide for accelerated vesting and settlement of outstanding non-vested equity awards in connection with a CIC. The near universal market practice is to vest and settle these awards upon a double trigger or upon a CIC if a successor entity fails to assume or adequately replace the award.
Lastly, CIC arrangements typically address golden parachute excise tax liabilities through a “best net” provision (which is described on page 17 of the Study).
Purpose of CIC Arrangements
Generally, CIC arrangements are provided to executive officers for the following reasons:
• Keep the Executive Neutral to Job Loss. The primary purpose of CIC arrangements is to keep senior executives focused on pursuing all corporate transaction opportunities that are in the best interests of shareholders, regardless of whether those transactions may result in their own job loss.
• Retain Key Talent. Corporate transaction activity may create uncertainty for critical executive talent. This uncertainty may create significant retention risk for a company. An executive with sufficient severance protection may be less likely to leave voluntarily to seek other employment in the face of transaction-related uncertainty.
• Maintain Competitive CIC Severance Benefits. A majority of large public U.S. companies provide their senior executives with some level of CIC protection. Thus, companies provide CIC protection to attract and retain top talent, especially in industry sectors undergoing substantial change and/or consolidation.
Forms of CIC Arrangements
CIC arrangements generally take the form of either: (i) a single CIC severance plan or policy that provides CIC protection to a group of executives; or (ii) individual employment contracts or severance agreements. The use of a single CIC severance plan or policy is increasing in prevalence for a number of reasons. Typically, companies find a single CIC severance plan easier to administer, revise and communicate than individual agreements. Further, a single plan approach ensures uniformity of terms and provisions for all covered executives, which is not always the case with individual agreements (often unintentionally).
CIC arrangements do not always cover the treatment of equity awards in connection with a CIC. Companies sometimes address CIC-related treatment of equity awards in their equity plans or applicable award agreements.
Executives Covered Under CIC Arrangements
Generally, a CIC arrangement covers senior executives who are directly involved in seeking out and implementing strategic corporate transactions and, to a lesser extent, other key executives who are at particular risk of job loss in the event of a CIC. Based on our experience, typical CIC arrangements cover a company’s CEO and the CEO’s direct reports and are generally limited to between 5 and 20 executives. However, equity plans or award agreements that provide CIC benefits (e.g., vesting or conversion of equity awards upon a CIC) often cover all plan participants.
Comparison to General Severance Benefits
To have a complete understanding of CIC arrangements, it is important to recognize the similarities and differences between such arrangements and general severance arrangements. General severance and CIC arrangements are broadly similar, as both provide NEOs with severance benefits upon the occurrence of a payment trigger. In addition, both arrangements may include restrictive covenants and condition the payment of benefits upon the execution of a release and waiver of claims. Typically, these arrangements coordinate the payment of benefits so that an executive may not draw benefits under both arrangements.
Despite the foregoing similarities, CIC arrangements and general severance arrangements differ in many material respects. For example, the benefits provided under CIC arrangements are generally greater than the benefits provided under a general severance arrangement. In addition, the payment of general severance benefits is commonly triggered solely upon an executive’s qualifying termination of employment (e.g., involuntary termination without cause), while payment of most CIC benefits requires the occurrence of a CIC and an NEO’s qualifying termination of employment following the CIC.
Another important distinction between CIC arrangements and general severance arrangements relates to the protection that the former provides to an NEO. At a minimum, CIC arrangements generally protect an NEO’s CIC severance benefit from diminution during a specified period following a CIC. In contrast, an NEO’s general severance benefits may be at risk of reduction or termination following a CIC.
Key Findings and Trends
Summarized below are the 2023 Study’s key findings:
Prevalence of CIC-Related Cash Severance and Vesting Acceleration
• 78% of Study Group companies provide CIC-related cash severance (and other related benefits) to one or more of their NEOs.
• 93% of Study Group companies provide for acceleration of vesting of one or more equity awards in connection with a CIC.
Cash Severance
• Over 99% of Study Group companies that provide CIC-related cash severance (and certain other benefits) condition the payment of such benefits upon the occurrence of a “qualifying termination of employment” within a specified period (i.e., “protection period”) following a CIC (“double trigger”).
― 100% of these companies define a qualifying termination of employment to mean a termination of employment without “cause” or for “good reason.”
― 71% of companies define the protection period as the 24-month period following a CIC.
― 95% of the companies define CIC to include: (i) acquisition of a specified threshold percentage of company stock; (ii) significant change in board composition; (iii) certain defined corporate transactions; and (iv) asset sale.
• 94% of these companies determine cash severance based on a multiple of an NEO’s base salary and “annual bonus.”
― For CEOs, a 3× cash severance multiple is a plurality practice (47%), with 2× multiple cash severance multiple next most prevalent (35%).
― For all NEOs (other than the CEO), a 2× cash severance multiple is the majority practice (54%).
Other CIC Related Benefits
• 67% of companies provide for the payment of a “stub year” bonus, of which 95% pay the bonus on a pro rata basis (typically based on target).
• 92% of companies continue health care benefits over a specified continuation period.
• 75% of companies address the potential imposition of the golden parachute excise tax through a “best net” provision.
Vesting and Payout of Equity Awards in Connection with a CIC
• 91% of companies vest time-based equity awards upon a double trigger (i.e., qualifying termination of employment following a CIC).
• 87% of companies vest performance-based equity awards upon a double-trigger.
― 35% of companies (the plurality practice) vest performance-based equity awards based on assumed target performance.
― 82% of companies pay vested performance-based awards in full.
Trends in CIC Severance Arrangements
Over the past 12 years, our studies have noted significant changes in the prevalence of key terms of CIC severance arrangements among large public companies. These changes are summarized below.
• Cash severance multiples have been trending down for all NEOs.
― For CEOs, the prevalence of 3× cash severance multiple has declined from nearly 65% in 2010 to 49%, with a corollary increase in the prevalence of 2× and 2.5x multiples to 42%.
― For other NEOs, on average, the prevalence of 3× cash severance multiple has declined from approximately 45% in 2010 to 15%, with a corollary increase in the prevalence of 2× multiple to 54%.
• Single-trigger vesting of equity awards has significantly declined in favor of double-trigger vesting.
― Once a majority practice, the prevalence of single trigger vesting (i.e., immediate vesting upon a CIC) of equity awards has declined to 9% for time-based equity awards and 13% for performance-based awards.
― In contrast, the prevalence of double-trigger vesting of time-based equity awards and performance-based equity awards currently stands at 91% and 87%, respectively.
• Few companies are covering the cost of a golden parachute excise tax.
― The prevalence of full and modified excise tax gross-up provisions has declined sharply from 60% in 2013 to 5%.
― In contrast, “best net” provisions have increased markedly in prevalence from 17% in 2010 to 75%.
Despite these dramatic change in prevalence, we believe any future changes are likely to be small and incremental.
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