Court: Amended Compensation Plan Does Not Trigger Severance

June 5, 2003 (PLANSPONSOR.com) - Failure to prove a post-merger compensation plan constituted a "reduction in compensation" leads a federal judge to rule severance plan participants are not entitled to benefits under the company's ERISA-governed change of control severance pay program.

>A judge in the US District Court for the District of Minnesota determined that the compensation plan approved after the merger offered participants the same guaranteed compensation as the employees received under the pre-merger plan in Johnson v. U.S. Bancorp. ¬† Therefore, participants in the original plan did not have “good reason” for voluntary termination under the first plan condition, according to Washington-based legal publisher BNA.

“Executives” Comp

>Account executives Brenda Johnson and Patricia Ormston participated in the US Bancorp Broad-Based Change in Control Severance Pay Program. US Bancorp and Firstar Corp. merged in February 2001, an event that triggered provisions of the Bancorp severance program.

>Under these provisions, participants were eligible for a severance program upon a voluntary termination of employment for “good reason” following a Bancorp change in control. The severance program defined “good reason” in two ways:

  • more than 10% reduction in the covered employee’s base and draw compensation, provided that the reduction was not replaced by other guaranteed compensation
  • more than 20% reduction in a covered employee’s variable compensation opportunity.

>Prior to the merger, account executives received a guaranteed base salary plus commissions. Immediately following the merger, US Bancorp initiated a new compensation plan, which based account executives’ pay entirely on commissions. Within days of instituting the new compensation plan, Bancorp withdrew that plan and instituted a plan with a “guaranteed non-recoverable draw.”

>The draw provided a base amount to account executives whose commissions for a particular month did not exceed the base amount. For the months in which the account executive’s commission exceeded the base amount, the account executive was paid only his or her commission. The draw was equal to an executive’s base salary before the merger, and the executive did not have to repay any of the draw out of future commissions.

However, the participants sought severance benefits under the plan, claiming the change in plans constituted a reduction in their compensation and therefore triggered their entitlement to benefits under the severance program. The administrative committee, did not agree, and denied the benefits because the change in compensation was not a “good reason” for voluntary termination under the plan. The participants¬†sued in federal district court claiming US Bancorp violated ERISA by not paying severance benefits as required under the plan.

Plain Meaning

>Addressing the first post-merger plan, the court found the plan that compensated participants entirely on commission was not in place long enough for participants to receive any benefits or suffer any detriments. “In order to qualify for severance benefits, the Plaintiffs must have actually suffered a reduction in compensation,” the court said.

>Further, the participants failed to demonstrate that the second post-merger plan, which provided account executives with a guaranteed non-recoverable draw, independently established “good reason” for voluntary termination so as to qualify for severance benefits, the court said.

>Therefore, the court agreed with the administrative committee, determining there was no reduction in compensation. The account executives received the same guaranteed compensation that they had received before the merger and therefore did not have “good reason” for voluntary termination under the first plan condition, the court said. Additionally, the new plan provided an increased variable commission thereby eliminating the possibility of the executives’ qualifying for severance pay under the second of the plan requirements for “good reason” for voluntary termination, the court said.

The case is Johnson v. U.S. Bancorp, D. Minn., No. 02-799 (PAM/SRN), 5/28/03.

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