Companies Making Changes to Change-in-Control Programs

Companies are changing their change in control (CIC) programs for executives, a new study by Mercer finds.

According to Mercer’s Change in Conrol Survey 2007, the majority of participating companies (80 percent) made changes to their program in the last two years.  Those changes are in response to shareholder concerns that the programs provide an expansive windfall to executives.

A change in control benefits, which are cash severances and stock awards paid to senior executives in connection with a corporate transaction, receive a large amount of scrutiny, but there has been limited information available.  The study ascertains that emerging trends and market practices with regard to change in control severance programs on all eligible program participants, not just the top five executives reported in proxies.

“While we expected to see a growing move toward Double Trigger, we were surprised by its magnitude. Of companies that made recent changes to their programs, the prevalence of Double Triggers for equity vesting was particularly high – 64 percent.” -- Diane Doubleday, Mercer

Shareholders, the study finds, want equity awards to accelerate only when the employee has also lost his or her job as a consequence of the corporate transaction, a so-called “double trigger,” as opposed to a “single trigger,” which occurs when a company accelerates vesting of equity awards simply because of a corporate transaction.

“While we expected to see a growing move toward Double Trigger, we were surprised by its magnitude,” Diane Doubleday, global leader of Mercer’s executive remuneration services said in a statement.  “Of companies that made recent changes to their programs, the prevalence of Double Triggers for equity vesting was particularly high – 64 percent.”

What’s more, golden parachute tax gross-ups, which are intended to put an executive in the same after-tax position that he or she would have been in absent the tax, were seen as another prevalent practice that is receiving criticism.

“The survey does not suggest that gross-ups will be disappearing anytime soon, but we’re starting to see a change in their structure,” Doubleday said.  “Companies that recently made changes to their programs reported a dramatic increase in the use of conditional gross-ups, which on their face seem a more responsible alternative because they may limit the company’s obligation to provide a gross-up.”