(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
Compensation consultant Frederic W. Cook & Co. just published a study of recent changes in change in control agreements. The study focuses on the practices of the 125 largest public companies. Frederic Cook found that, of the companies that use change in control agreements, 57% made changes in the past three years, including a number of changes that make the agreements less "executive-friendly". The changes included the following:
Many of the companies modified their excise tax gross-ups - the commitment to reimburse the executive for excise taxes payable as a result of excessive change in control payments. Eleven percent of the companies eliminated the gross-ups entirely. Another eight percent modified their gross-ups, moving to a modified gross-up formula instead of a full gross-up.
Nine percent moved from single-trigger vesting of equity awards upon a change in control to double-trigger vesting.
Nine percent modified their severance multiples. In many cases, the multiples for top officers were changed from 3X to 2X.
The Cook study also describes numerous other changes.
The Cook study points out that the first two provisions described above (tax gross-ups and single-trigger vesting) are considered "poor pay practices" under the standards of RiskMetrics Group. If these provisions are contained in new or materially amended agreements, RiskMetrics may recommend to shareholders that they vote against compensation committee members at the next annual meeting. This factor may have resulted in pressure on compensation committees to change these provisions in their change in control agreements.
The Cook study points out that some of the legislation being considered in Congress would not only require "say on pay" but would also require "say on severance" - an annual non-binding shareholder vote to approve golden parachutes. The study predicts continuing changes in change in control agreements.