Publish Date

Jan 22, 2020

Key Findings of the 2019-2020 Executive Change in Control Report

A&M Tax Advisor Weekly

In recent years, external forces have continued to advocate for more transparency and change with respect to executive compensation. Change in control provisions for executives are often easy targets for criticism; however, many business reasons support the need for companies to maintain these types of plans. Now more than ever, it is important to ensure that your change in control arrangements are in line with market and strike the appropriate balance of furthering the company’s strategic goals without resulting in an unwarranted windfall to executives.

To assist companies in understanding the current environment regarding executive change in control arrangements, Alvarez & Marsal conducted its 8th edition of the Executive Change in Control Report, which analyzes the pay practices of the top 200 publicly traded companies in the U.S. across 10 different industries. This year Alvarez & Marsal is again happy to partner with Equilar, who added commentary on their research around change in control benefits in recent actual transactions.

This edition of Tax Advisory Weekly explores the key findings of the analysis. Click here to find the comprehensive report with the full study results, including industry-specific analysis.

Key Findings

The analysis focused on change in control protections provided to both the chief executive officer (CEO) and chief financial officer (CFOs). Below is a summary of some of our key findings.

Average Total Value of Change in Control Benefits

Although the amount of change in control benefits is sizeable, they only represent a small fraction of the overall deal value as shown below:

For five notable deals in 2019, the average amounts paid to each company’s CEO and CFO exceeded $127 million.

Excise Tax Gross-ups

As shown in the chart below for CEOs, excise tax gross-ups have fallen out of favor and significantly declined in prevalence over the past several years. Meanwhile, “valley provisions” or “best-net,” which cut back amounts to avoid excise tax if it is more financially advantageous to the executive, are more prevalent.

Recent research by Equilar observed a similar trend in companies implementing an excise tax gross-up on the eve of an actual transaction. Equilar found that while some companies got pushback on this practice, few consequences materialize for this action at the 11th hour before a transaction.

Equity Awards

Long-term incentives make up approximately 66% of the average total change in control amounts for CEOs and CFOs. Over the last several years, we’ve observed a substantial increase in double-trigger vesting (change of control and termination of employment required to accelerate vesting of equity awards) as shown below:

Alvarez & Marsal Taxand Says:

Companies face pressure from shareholders, shareholder advisory firms and regulators to market align change in control benefits provided to executives. At the same time, change in control benefits can assure that executives act in the best interest of shareholders. Boards of directors and compensation committees need to remain attentive to changing market trends and be ready to respond when challenges arise regarding the benefits provided to executives.