Companies Tinker with CIC Payouts under Shareholder Pressure

November 29, 2007 ( - Faced with stepped-up shareholder scrutiny over lucrative golden parachutes for executives involved in merger & acquisition (M&A) activity, many companies are retooling their change in control (CIC) programs, a new study found.

A Mercer news release about its latest study said 60% of the firms responding to its survey changed their CIC efforts in the last two years. The release said some of the alterations involved the design of the change of control award, whether the equity awards involved have accelerated vesting because of an isolated corporate transaction known as a “single trigger.” That design is seen as a windfall to the department employee, Mercer said.

In its report, Mercer said instead shareholders 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.”

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

Mercer also studied another sometimes controversial practice – golden parachute tax gross-ups. The gross-up is intended to put the executive in the same after-tax position that he or she would have been absent the excise tax, Mercer said, explaining that the cost to companies can be substantial and often far exceeds the net benefit delivered to the executive.

According to its poll results, of companies that made recent changes to their programs, 56% instituted a conditional gross-up for the top executives, trimming benefits in some cases.

“The survey does not suggest that gross-ups will be disappearing any time soon, but we’re starting to see a change in their structure,” said Doubleday. “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.”

Mercer’s Change in Control Survey 2007 includes responses from 182 U.S. participants across 20 industries with median annual revenue of $3.3 billion.

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