Severance Trends - Outplacement - The Hay Group

Severance Trends

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1

Discussion areas
1

Introductions

2

Overview of current landscape

3

Key considerations around severance

4

The bad and the ugly

5

Good Citizens

6

Next Steps

7

Q&A


Sponsored by

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Introductions
Presenter


Dan Moynihan, CCP, CECP, Principal, Executive Compensation, Hay Group
 Daniel.Moynihan@haygroup.com | 201.557.8423

Today’s Webinar Sponsor


Careerminds
 Affordable, virtual outplacement services
 www.careerminds.com


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About Hay Group
Global organizational and human resources consulting firm










Compensation and benefits consulting
Employee, organizational and customer research
Executive coaching/leadership development
Organizational effectiveness and management development
Work design/strategy alignment
Information business
Founded in 1943
Offices in 49 countries
 Ten US offices


5

02
Overview of Current Executive
Compensation Landscape

What are the key issues today?
 Dodd-Frank provided a “perfect storm” of shareholder empowerment around
executive pay


The Act arms shareholders with more information and power than ever before, while
making it harder for management to accumulate votes
 Say on pay, say on when, and say on parachutes

 In response to increased pressure from shareholders and proxy advisory firms,
companies continue to monitor their executive compensation programs


Only 41 companies failed in 2011, and thus far we have had 39 fail in 2012…is the
hubbub worth it? (as of 6/5/12)

 Given today’s intense scrutiny of executive compensation, we are seeing
companies and compensation committees re-evaluate their programs annually
 New governance standards include implementing updated clawback policies
 Media and shareholders are lashing out against egregious severance packages
and pay for failure


7

What's next?
A false sense of security?

 Say on parachutes is a key issue as well
 We believe that the single biggest factor influencing the say on pay voting
trends last proxy season was strong company performance


The fact that pay programs have been “cleaner” has certainly had impact



But at the end of the day, shareholders will make 2012 all about company
performance again

 Don’t be fooled by the modest shareholder reaction of 2011 and 2012 –
if performance declines while pay does not, you can be sure that
shareholders will make themselves heard in 2013!
 Citigroup is the most notable Say on Pay failure to date


8

What to Expect in 2012 and 2013



Continued government interest and involvement, specifically through Dodd-Frank
Due to shareholder and proxy advisory firm influence, continued conservatism
around the optics of certain pay program features and design:




Elimination of excise tax gross-ups and fewer perquisites





Lower severance multiples in the C-Suite





Double triggers on equity plans

Increased share ownership guidelines or holding requirements

Increased use of TSR-based performance plans to ensure executives don’t win if
shareholders lose
Greater focus on implementation of clawback policies




New Frank bill prohibiting clawback insurance

More companies will defer a portion of bonuses into stock


Both a “risk in compensation” issue as well as a mechanism to enforce clawbacks


9

Companies need to be aware of the “breaking point” for each pay element
What Makes
Business Sense?

Topic

What Do Shareholders
Want?

Where’s The
Breaking Point?

Pay Philosophy

Pay positioning that maps to
competitive positioning

Pay positioning that maps
to competitive positioning

Targeting P75 without
P75 performance

Pay Mix

Mapping pay mix to key time
horizons for the business

>50% in LTI for CEOs

>50% in STI

Performance
Measures

A balance that rewards something
when returns are low but the team
outperforms plans and the market

High absolute returns AND
relative outperformance

Big payouts when
shareholders lose

STI / Bonuses

Allowing some discretion when
warranted; Balancing financial and
strategic measures

Formula-driven financial
performance

Overriding the formula
with big discretionary
payouts

LTI

Performance vesting when linked to
the “right” measures and key
milestones

Less dilution
Performance vesting

Lack of a performancevested vehicle


10

Companies need to be aware of the “breaking point” for each pay element
What Makes
Business Sense?

Topic

What Do Shareholders
Want?

Where’s The
Breaking Point?

Perquisites

Some of these, some of the time

None of them

Gross-ups, excessive
personal use of plane

Change in Control

Incentive for executives to be
aligned with the best interest of
shareholders

Double-triggers
2x payouts (from 3x)

Single triggers – even
on equity – and grossups

Managing Risk in
Pay

Some balance – but not too
much
Pay profile that maps to the risk
profile

Balance, but with a focus on
shareholder value

One measure that
drives most of the pay


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03
Key considerations around
severance

Severance and
Change-in-Control Philosophy


Generally, organizations that utilize severance and change-in-control agreements base
this decision on one or more of the following:


Provide reasonable protection for executives in order to eliminate or reduce
distractions that might otherwise be caused by uncertainly over the executive’s
employment and/or financial circumstance (Bridge to Future Employment)



Provide the organization protection against competition and solicitation (Retention)



Enable the organization to attract and retain quality executive talent (Attraction)



Provide benefits that will eliminate or reduce the reluctance of management to
pursue potential change-in-control transactions that would be in the best interest of
shareholders, while preserving their neutrality in the negotiation of the transaction
(Replacement of Lost Future Earnings)


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Executive Severance Policy Elements


Describe basic purpose:





To reward past service
To provide a “bridge” to future employment

Outline when employees are and are not eligible for severance


Describe employer’s discretion



Full-time vs. part-time? Salaried vs. hourly? Business units?



Resignation? Retirement? Death? Misconduct or similar performance reasons?



Sale or transaction where employee is offered continued employment by successor
organization (Change in Control)



Decide whether to include formula for calculating amount



Condition payment on signing release


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Elements of Severance Benefits


Base Salary




lump sum vs. installments (alignment with restrictive covenants)

Bonus





payment of “earned” bonus for termination year
multiple of annual bonus

Benefits & Perquisites




typically continued health benefits

Vesting and/or Payout of Equity


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CEO Severance in the U.S.


What is it?


Usually defined as payments arising as a result of termination of employment with
good reason or without cause
 Good reason – reduction in duty or title, breach of employment agreement by

Company, etc.


Good reason is being changed to eliminate trigger when all executives have
pay reduced or frozen



Does not include change in control payments which typically include acceleration of
equity vesting



Historically set at 3x compensation – now closer to 2x or modified amount to get
under 280G caps


16

CEO Severance in the U.S.


Prevalence


2011 proxy filings in the U.S. for WSJ/Hay Group 300 companies indicated that 76%
of CEOs would receive severance payments for qualifying terminations



90% are no longer offering a gross up for tax purposes
 ISS has certainly won this battle



Growing movement in the US for “sunset” provisions on severance pay
 Declining severance as tenure increases


17

Non Executive Severance in the U.S.


Most often tied to length of service with some minimum level of payout


Where a formula is used, most organizations provide 1 – 2 weeks of pay per year of
service,
 Guaranteed minimum of 2 weeks in most organizations surveyed



Maximum values




Most plans cap out at one year (52 weeks) for non-executive severance

Pay is defined as


Base Salary + Pro-Rata share of bonus
 Approximately 26% of companies use the target bonus for the calculation



Often tied to covenants




Non compete, non solicit, and confidentiality

Paid out


42% of companies use salary continuation



40% of companies use lump sum



Balance of organizations give a choice


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Other Severance Benefits


Health Insurance or COBRA




Generally, fully or partially subsidized during severance period

Outplacement


According to a WorldatWork Severance Study in 2011
 50% of Companies are providing some level of outplacement


Typically for 3-6 months, but many decide on a case by case basis

 The majority of companies are providing either individual or group outplacement



A growing trend involves the use of virtual outplacement organizations, in lieu
of traditional brick and mortar facilities

Acceleration of Vesting on Equity


Typically involves a double trigger
 Change in Control AND a second qualifying event such as:


Loss of Job



Diminution of Duties



Relocation of Corporate offices


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Over $100M in Severance
Source :GMI, January 2012 report

Company
General Electric
Exxon Mobil Corp.
UnitedHealth Group Inc.
AT&T
Home Depot Inc.
North Fork Bank
Merck & Co., Inc./Schering-Plough
International Business Machines
Pfizer Inc.
CVS Caremark Corporation
Gillette Co.
Target Corporation
Merrill Lynch & Co. Inc.
U.S. Bancorp
Omnicare, Inc.
Wachovia/South Trust
United Technologies Corporation
eBay Inc.
WellPoint Health Networks

CEO
John F. Welch Jr.
Lee R. Raymond
William D. McGuire
Edward E. Whitacre Jr.
Robert L. Nardelli
John A. Kanas
Fred Hassan
Louis V. Gerstner Jr.
Hank A. McKinnell Jr.
Thomas M. Ryan
James M. Kilts
Robert J. Ulrich
E. Stanley O’Neal
Jerry A. Grundhofer
Joel F. Gemunder
Wallace D. Malone Jr.
George A. L. David
Margaret C. Whitman
Leonard Schaeffer

Tenure
1981-2001
1993-2005
1991-2006
1990-2007
2000-2007
1977-2006
2003-2009
1993-2002
2001-2006
1998-2011
2001-2005
1994-2008
2002-2007
2001-2006
2001-2010
1981-2004
1994-2008
1998-2008
1992-2004

Severance
$417,361,902
$320,599,861
$285,996,009
$230,048,463
$223,290,123
$214,300,000
$189,352,324
$189,005,929
$188,329,553
$185,415,435
$164,532,192
$164,162,612
$161,500,000
$159,064,090
$146,001,476
$125,292,818
$122,631,309
$120,427,360
$119,041,000

XTO Energy Inc.
Viacom

Bob R. Simpson
Thomas E. Freston

1986-2008
2006-2006

$103,485,972
$100,839,772


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The CEO revolving door
The ugly



At Hewlett-Packard


$47+ million in severance payouts while thousands of employees have lost their jobs

HP Severance or Sign On
$25
$20
$15
$10
$5
$0


$21
$12.70 $13.20 $13.10

Severance or
Sign On

22

The CEO revolving door
The ugly



In 2007, Carly Fiorina walked away with more than $21 million in cash-stock severance,
after she struggled to turn around the company.



Her successor, Mark V. Hurd left with severance of more than $12.2 million after he was
forced to step down amid accusations of an improper relationship.



Then, Mr. Apotheker’s $13.2 million severance payout when the stock price was cut in
half.




That is made up of $7.2 million in cash, the ability to sell $3.6 million of restricted
stock and a $2.4 million bonus. H.P. also paid $2.9 million to relocate Mr. Apotheker
to California, will now pay to move him to Belgium or France and cover losses of up
to $300,000 on the sale of his house

Last fall, H.P. hired Meg Whitman, its new chief executive, would receive a sign-on
package worth about $13.1 million


Much of the compensation comes from a stock option grant that is subject to certain
performance targets



She also stands to collect severance if she leaves


23

Mergers create WEALTH for executives
Motorola Mobility/Google


Sanjay Jha leaves with $64.3 million golden parachute


The largest component of Jha's golden parachute is $52.4 million in accelerated equity awards, meaning they
vested when the Google deal was completed.


$10 million consists of stock options and restricted stock units that vested at the time the acquisition
closed.



The vesting of the remaining equity awards was triggered by Jha's termination without cause within two
years of the deal.



Jha's overall 2011 compensation totaled $47.15 million, compared with $13 million in 2010,



According to Paul Hodgson, a senior research associate with GMI Ratings, an independent provider and evaluator
of global corporate governance data.




Proxy advisory firm Glass Lewis & Co. had recommended that shareholders vote against the golden parachute




Glass Lewis noted that much of Jha's compensation consisted of "'inducement' grants in connection with his
initial hiring" that were not connected to performance.

Jha's package also includes $10.8 million in severance, which was calculated by tripling (3x) the sum of his $1.2
million base salary and $2.4 million target bonus.




"Equity awards are given to CEOs and other executives to retain them and reward performance over the long
term. Since (these awards) are doing neither of those things, most shareholders would look at that and say,
'Why are we paying him that? It's illogical.'"

In addition, he collects nearly $1 million in prorated bonus, assuming a full-year target bonus of $2.4 million.

The final and smallest piece of Jha's golden parachute is $64,407 in other perquisites and benefits, such as
continued medical, dental and life insurance benefits, as well as financial planning services.


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05
What a good citizen looks like…

Examples of Good Practice


Some CEO’s do not negotiate for or take big payouts


Oswald Grübel, the chief executive of UBS who stepped down after a trader
concealed more than $2.3 billion of losses, will receive $1.6 million
 This is equivalent to the standard severance package of six months’ salary given

to all senior executives at the Swiss bank


Stanley/Black & Decker Chairman, Nolan Archibald, declines his parachute payment




Others have a sunset provision on their severance, so that as tenure increases,
severance decreases




Estimated value @ $20.5 Million

This does not suggest that in a Change of Control, the equity would not vest

At change of control, leading companies have:





Double Triggers
No Gross Ups

Many organizations have modified their package to get under the 280G caps


Set plans at 2.99x, or the level at which no excise taxes will be imposed


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07
Next Steps for your business

Severance


Review all severance, employment, and change of control arrangements



Consider eliminating employment agreements




Focus on staying under 280G limits




Replace with severance agreements, if possible
2.99x or modified amount based on 280G levels

Create a policy to cover Rank and File Severance





Set a minimum and maximum value
Create policy for number of weeks/year of service or other formula that works for
your business

Look at other benefits during severance to see what makes sense for your business


Health Insurance & COBRA



Outplacement Services


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