Severance Trends - Outplacement - The Hay Group

1 © 2012 Hay Group. All rights reserved

Severance Trends

Sponsored by


Discussion areas

Introductions

Overview of current landscape

Key considerations around severance

The bad and the ugly

Good Citizens

Next Steps

Q&A

1

2

3

4

5

6

7 Sponsored by

01 Introductions


Introductions

Presenter

Dan Moynihan, CCP, CECP, Principal, Executive Compensation, Hay Group

[email protected] | 201.557.8423

Today’s Webinar Sponsor

Careerminds

Affordable, virtual outplacement services

www.careerminds.com

mailto:[email protected]

http://www.careerminds.com/


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


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


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?


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


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


Companies need to be aware of the “breaking point” for each pay element


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


Companies need to be aware of the “breaking point” for each pay element

03 Key considerations around severance


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)


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


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


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


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


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


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…


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


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


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


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…


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


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