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Description of the topic: Over the past two years, we have seen how Say on Pay and Dodd-Frank have increased the scrutiny on executive pay to unprecedented levels. Now, more than ever, we need to be mindful of the poor pay practices that can lead a company down a troublesome path. One of the key HR challenges is the development of responsible severance programs that will not cause your various stakeholders to vote against the Company in the Say on Pay vote. The attendees will gain clarity and insight into why these problematic issues exists in pay plans, and how by cleaning them up, the scrutiny will subside, and executive compensation can be used to attract, reward, motivate and retain your top talent while they are with you, and provide a soft landing when they leave your employ. We will look at some examples of companies where egregious severance package and change in control agreements caused a media uproar, then look at best practices in this area, and wrap up with a look at some organizations that are model citizens when it comes to severance. This interactive webinar will include open Q&A, interactive polls, and dialogue on the trends and best practices to implement to ensure you are being fair to your employees, shareholders, and the bottom line. Biography Dan Moynihan, Principal, Executive Compensation Dan Moynihan is a Principal in Hay Group’s Metro New York office. Dan works closely with Boards and management on programs and plans that help to attract, retain, motivate and focus their top executive talent. Dan works directly with clients to clarify their compensation and human resource objectives to develop programs that maximize their resources and existing infrastructure. His responsibilities include the design and development of executive compensation programs that help to drive attraction, motivation, and retention of key personnel. He advises Boards and executives at number of public and private organizations, including Vitamin Shoppe, 1-800 Flowers, Cape Bank, Central European Distribution Corporation, American Water Works, Charming Shoppes, and GNC. Dan works across multiple sectors, including high technology, financial services, life sciences, healthcare, chemical, consumer products, insurance, manufacturing, and retail.
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1 © 2012 Hay Group. All rights reserved
Severance Trends
Sponsored by
2 © 2012 Hay Group. All rights reserved
Discussion areas
Introductions
Overview of current landscape
Key considerations around severance
The bad and the ugly
Good Citizens
Next Steps
Q&A
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3
4
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7 Sponsored by
01 Introductions
4 © 2012 Hay Group. All rights reserved
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
5 © 2012 Hay Group. All rights reserved
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
02 Overview of Current Executive Compensation Landscape
7 © 2012 Hay Group. All rights reserved
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
8 © 2012 Hay Group. All rights reserved
What's next?
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
A false sense of security?
9 © 2012 Hay Group. All rights reserved
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:
Double triggers on equity plans
Lower severance multiples in the C-Suite
Elimination of excise tax gross-ups and fewer perquisites
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
10 © 2012 Hay Group. All rights reserved
Topic What Makes
Business Sense?
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 performance-
vested vehicle
What to Expect in 2012 and 2013
Companies need to be aware of the “breaking point” for each pay element
11 © 2012 Hay Group. All rights reserved
Topic What Makes
Business Sense?
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 gross-
ups
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
What to Expect in 2012 and 2013
Companies need to be aware of the “breaking point” for each pay element
03 Key considerations around severance
13 © 2012 Hay Group. All rights reserved
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)
14 © 2012 Hay Group. All rights reserved
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
15 © 2012 Hay Group. All rights reserved
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
16 © 2012 Hay Group. All rights reserved
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
17 © 2012 Hay Group. All rights reserved
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
18 © 2012 Hay Group. All rights reserved
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
19 © 2012 Hay Group. All rights reserved
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
04 The bad and the ugly…
21 © 2012 Hay Group. All rights reserved
Over $100M in Severance
Source :GMI, January 2012 report
Company CEO Tenure Severance
General Electric John F. Welch Jr. 1981-2001 $417,361,902
Exxon Mobil Corp. Lee R. Raymond 1993-2005 $320,599,861
UnitedHealth Group Inc. William D. McGuire 1991-2006 $285,996,009
AT&T Edward E. Whitacre Jr. 1990-2007 $230,048,463
Home Depot Inc. Robert L. Nardelli 2000-2007 $223,290,123
North Fork Bank John A. Kanas 1977-2006 $214,300,000
Merck & Co., Inc./Schering-Plough Fred Hassan 2003-2009 $189,352,324
International Business Machines Louis V. Gerstner Jr. 1993-2002 $189,005,929
Pfizer Inc. Hank A. McKinnell Jr. 2001-2006 $188,329,553
CVS Caremark Corporation Thomas M. Ryan 1998-2011 $185,415,435
Gillette Co. James M. Kilts 2001-2005 $164,532,192
Target Corporation Robert J. Ulrich 1994-2008 $164,162,612
Merrill Lynch & Co. Inc. E. Stanley O’Neal 2002-2007 $161,500,000
U.S. Bancorp Jerry A. Grundhofer 2001-2006 $159,064,090
Omnicare, Inc. Joel F. Gemunder 2001-2010 $146,001,476
Wachovia/South Trust Wallace D. Malone Jr. 1981-2004 $125,292,818
United Technologies Corporation George A. L. David 1994-2008 $122,631,309
eBay Inc. Margaret C. Whitman 1998-2008 $120,427,360
WellPoint Health Networks Leonard Schaeffer 1992-2004 $119,041,000
XTO Energy Inc. Bob R. Simpson 1986-2008 $103,485,972
Viacom Thomas E. Freston 2006-2006 $100,839,772
22 © 2012 Hay Group. All rights reserved
The CEO revolving door
At Hewlett-Packard
$47+ million in severance payouts while thousands of employees have lost their jobs
The ugly
$21
$12.70 $13.20 $13.10
$0
$5
$10
$15
$20
$25
HP Severance or Sign On
Severance or Sign On
23 © 2012 Hay Group. All rights reserved
The CEO revolving door
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
The ugly
24 © 2012 Hay Group. All rights reserved
Mergers create WEALTH for executives
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.
"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.'"
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.
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.
Motorola Mobility/Google
05 What a good citizen looks like…
26 © 2012 Hay Group. All rights reserved
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
Estimated value @ $20.5 Million
Others have a sunset provision on their severance, so that as tenure increases,
severance decreases
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
07 Next Steps for your business
28 © 2012 Hay Group. All rights reserved
Severance
Review all severance, employment, and change of control arrangements
Consider eliminating employment agreements
Replace with severance agreements, if possible
Focus on staying under 280G limits
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
Q&A
Recommended