Trigger Happy: The Bar Rises for Change-in-Control Benefits

More companies are appeasing shareholders on a controversial executive compensation scheme.

Companies are responding to shareholder concerns about executives earning undue benefits that take effect after mergers and acquisitions, according to Mercer, the consultancy. Many are now raising the criteria executives must meet to qualify for the controversial “change-in-control” benefits.

Such benefits usually include cash severance and stock awards. This often equates to two or three times an executive’s existing salary and bonus, plus accelerated vesting of stock and retirement benefits.

Mercer — which helps companies with their compensation schemes and thus benefits from encouraging them to make changes — polled 182 American firms across 20 industries and found that 60 percent of them altered their programs during the last two years.

The most significant change, Mercer found, was the transition from “single trigger” equity vesting to “double trigger” equity vesting. The single trigger entitles executives to benefits in the event of a corporate transaction, such as a merger, regardless of its impact on their job. The double-trigger option allows equity awards only for executives who lose their jobs as the result of a merger or other transaction.

“While we expected to see a growing move toward double trigger, we were surprised by its magnitude,” said Mercer consultant Diane Doubleday.

Change-in-control payments are intended to serve as an incentive for executives to act in the interest of shareholders during a takeover, despite the risk of losing their jobs. But many have argued that the system does not benefit shareholders.

“Shareholders want equity awards to accelerate only when the employee has also lost his or her job as a consequence of the corporate transaction,” the report said.

An August report by Watson Wyatt, another benefits consultancy, found that 64 percent of institutional investors thought that change-in-control agreements for top executives were “unfriendly” to shareholders. Further, 77 percent of directors said that severance and change-in-control provisions should be positioned at the “market median.”

The authors of the Watson Wyatt report, Ira Kay and Steven Seelig, recommended use of the double-trigger approach. In their view, the second trigger should occur when an executive’s position is eliminated after a merger or if the acquiring company does not assume or replace the awards that the executive is owed.

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