Abstract
Since the enactment of Say on Pay in January 2011, companies are required to disclose the amounts payable to named executive officers as a results of an acquisition. There have been 1,524 U.S. public takeovers from 2011 to 2017, which have disclosed golden parachute payments to executives. The author describes payments made by sector, payment types, triggering events and the propensity of voters to accept, or reject, golden parachute payments based some of the more concerning pay practices.
Introduction
In 2006, the Securities and Exchange Commission (SEC) adopted changes to disclosure requirements that established that public companies must fully disclose information regarding compensation for each of the company’s executives that is based on, or otherwise relates to, a merger. 1 This would eliminate the, often ambiguous, narrative that could confuse all but seasoned financial analysts from gaining an answer to the question, “How much is this executive being paid in this deal?”
Furthermore, in January 2011, The SEC approved final rules that amended to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). These rules stated that companies are “required to provide additional disclosure regarding compensation arrangements with executive officers in connection with merger transactions, known as ‘golden parachute’ arrangements.” 2 This mandated an increase in the amount of information that public companies must disclose regarding payments made to certain Named Executive Officers involved in a change-in-control transaction.
In accordance with the additional disclosure present in Dodd-Frank, came “Say-on-Pay.” This provided shareholders the ability to vote on compensation received by corporate executives. One of the elements of Say-on-Pay deals with shareholder approval of compensation packages in the event of a merger. This vote is also known as the “Say on Golden Parachutes” provision. 3
The two aforementioned rulings provide a means for stakeholders and researchers to easily obtain golden parachute data. As of 2011, these data are accessible in merger proxies, going-private and tender offer solicitation statements filed with the SEC. The Information Table will state the executive’s name and itemize the components of compensation and include the total value payable to each executive. An accompanying narrative is to further describe the situation in which compensation is paid, or may become payable, the material conditions applicable to receipt of payment and the triggering circumstances for those payments. 4
In addition to the mandates set forth by the SEC, proxy advisory firm Institutional Shareholder Services (ISS) states that inclusion of items such as single-trigger cash severance payments, gross-up payments and single-trigger equity acceleration are “features that may result in an against recommendation.” 5 With these forces working toward disclosure and transparency, expectations would seem to be for companies to decrease pay practices that are unfriendly to investors, or even deemed problematic.
How have companies responded to this legislation? What effect has this had on golden parachute payments? Has this led to any reduction in items as single-trigger cash payments, equity acceleration or gross-ups? Finally, have investors displayed any objection regarding merger-related compensation in their voting decisions? Or, is this regulatory intervention that is generally ignored by shareholders? This report will provide detailed compensation analysis of named executive officers of U.S. public companies involved as a target in a merger (M&A) transaction since the Say-on-Pay requirement in 2011.
Note. Hereinafter, the term NEO will be used to describe all executives excluding the Chief Executive Officer (CEO).
Research Guidelines
All Tender Offer and Merger Agreements dating back to January 2011 were collected using the SEC’s EDGAR full-text advanced search. Standard M&A data items such as target, acquirer, offer price and announcement/completion dates were identified for each transaction. The transactions were verified for inclusion requirements and valued.
The inclusion requirements consisted of all U.S. public targets trading common shares with a minimum equity value of $10 million. Repurchases, self-tenders, rumors, seeking buyer deals and spin-offs were excluded from the dataset. Only full takeovers were considered in this study. The author defines a full takeover as the acquiring company seeking to own 100% of the target from an initial position of less than 50% ownership.
The M&A valuation methodology consisted of target shares sought multiplied by price-per-share (PS). Stock consideration offered was valued based on the acquirer’s stock price one day prior to public announcement of the transaction. In-the-Money options outstanding were included in the equity value of the deal. Transactions that were terminated prior to the disclosure of the merger agreement were not included in this study.
After producing the list of M&A transactions, the merger proxies and tender offer documents (schedule 14D-9) were read to find compensation payment types, values, triggering options, shareholder voting results, the executives and their respective positions.
A note on the Total column in the Information Table included in the relevant filings: This is the aggregation of the Cash, Equity, Non-Qualified Deferred Compensation (NQDC), Perquisites, Gross-Up and Other columns for the respective executives. These values did not properly sum those individual columns in several filings. Many of these were oversights in the initial merger proxy and were subsequently corrected in the amendments. However, there were 60 instances where the transaction was consummated without an amendment being filed, nor could the correct values be reconciled from the proxy. In those occurrences, the author defaulted to the value in the Total field.
Results
The research generated 1,524 transactions that qualified under the inclusion criteria. Tables 1 and 2 show, respectively, the annual distribution and number of deals for each sector that were included in this study.
U.S. Public Target Mergers by Year.
U.S. Public Target Mergers by Sector.
Table 3 shows the average itemized Change-in-Control (CIC) payments to CEOs by sector. Consumer Staples and Energy sector CEOs received the largest payout with an average of $17.95 million and $15.81 million, respectively. Consumer Staples led in 4 out of the 6 categories—only trailing in Gross-Up and Other payments—with the majority of the composition coming from average Equity payments of $10.78 million. CEOs in the Financials sector paled by comparison, earning an average of $4.17 million.
Average CEO Change-in-Control Payments, 2011 to 2017, by Sector.
NEOs in both the Energy and Consumer Staples sector saw nearly equivalent average total payments of $5.51 million each (Table 4). Both these sectors demonstrated the same equity-heavy composition as their CEO counterparts. Payout in the Financials sector was also lowest for NEOs with an overall average of $1.73 million. One unique item for NEOs was the excessive average Perquisite payment of $104,050 in the Consumer Staples sector. This was 62.3% higher than the nearest sector perquisite payment in Utilities at $64,018.
Average NEO Change-in-Control Payments, 2011 to 2017, by Sector.
CEOs out-earned their NEO colleagues by an average factor of 2.88. This ranged from a low of 2.14× in Real Estate to a high of 3.43× in Utilities.
Tables 5 and 6 show the respective CEO and NEO payment composition by sector. Both executive classes received over 90% of the merger-related compensation in Cash and Equity. The only sectors in which the Cash composition was greater was in Financials for CEOs, and in Financials and Utilities for NEOs. Health Care represented the least amount of cash payable to both executive level: comprising 19.4% of total amount payable to CEOs and 20.1% payable to NEOs.
CEO Change-in-Control Payment Composition by Sector.
NEO Change-in-Control Payment Composition by Sector.
Gross-Up Payments
Gross-Ups are payments are made to reimburse the executive for excise taxes that they will become responsible for due to golden parachute payments. These “make whole” payments relieve the executive of tax burdens due to a triggering event such as a merger. In recent years, gross-ups have been seen as an undesirable practice that could reflect negatively on the company’s board rating. 6
For this 7-year period, 514 executives were recipients of gross-ups due to their respective M&A transactions, with CEOs accounting for 146 (28.4%) of those executives. Of the 1,349 CEOs included in this study, 10.8% were eligible to receive gross-ups.
The number of executives that were eligible to receive gross-up payments has significantly decreased since the disclosure mandate. While there has not been a steady linear decline in the number of gross-ups offered, all of the years following 2011 (the first year for the golden parachute disclosure) which saw 108 executives eligible for a gross-up, have decreased. The number of gross-up eligible executives in those years range from 50 to 79, which represent decreases of between 26.85% and 53.7% (Figure 1).
Average gross-up values and number of executives receiving gross-up payments.
The average gross-up payment value varied throughout this period from a minimum of $1.64 million in 2013 to the maximum average of $3.56 million in 2015. While the number of executives receiving gross-ups have decreased throughout the 7-year period (40.74%), the values of the gross-ups have only slightly decreased (6.03%) from 2011 to 2017.
Transactions which include a gross-up component as a percentage of all transactions with disclosed golden parachute payments are listed in Figure 2. This displays a downward trend in companies offering a gross-up component, which confirms estimates from consulting firms Alvarez & Marsal and Meridian Compensation Partners.7,8 Throughout this 7-year period there is a 63% decrease in the percentage of transactions containing a gross-up.
Number and percentage of deals with gross-up component.*
Gross-ups payable as a function of the transaction value display an overall increase in the percentage of NEOs that receive these payments as the value increases (Figure 3). CEOs hit an apex in the $1 to $10 billion range with 15.99% of all CEOs receiving gross-up payment. However, in the largest deals, with a transaction value greater than $10 billion, the number of CEOs receiving a gross-up declines to 15.38%. For these largest transactions, the percentage of NEOs receiving gross-ups surpasses CEOs with 15.66%. This demonstrates that executives at larger valued companies are more likely to have a gross-up payment than those at smaller companies.
Percentage of executives with gross-up payments by deal value.
The sectors with the most gross-ups were Health Care and Information Technology, with 43 and 31 deals, respectively. The Materials sector’s executives had the highest average gross-up payments with $3.46 million, followed by Health Care with $3.34 million (Table 7).
Sector-Level Gross-Up Payments.
When comparing merger-related compensation vote results, in transactions both with and without gross-ups we see a significant decline in the acceptance rate for gross-up deals (Figure 4). In 2011, at the commencement of the increased disclosure mandate, the compensation voting results were comparable: 87.88% without a gross-up and 81.86% with a gross-up. This is only a difference of 6.02%. Observing the subsequent 6 years, we see an average difference of 18.11%, ranging from 11.4% in 2013 to 26.19% in 2015. While voting rationale may be subjective, this demonstrates the propensity of voters to reject golden parachute packages that contain gross-ups.
Average compensation vote acceptance rate.
Cash Payments
Cash is a ubiquitous compensation method in golden parachutes, with 86.5% of executives receiving this type of payment. This included 90% of all CEOs and 86% of non-CEOs. The term “single-trigger” refers to a payment to executives solely upon consummation of the merger—post-merger employment status is not applicable. This provides the executive with a cash payout while still being employed by the company once the deal is done. The occurrences of cash payment triggers over the course of this 7-year period were the following: single: 8.29%; double (payment upon consummation of merger and termination): 78.18%; mixed (both single and double-trigger): 13.22%; and modified single (payment upon consummation of merger and executive electing to leave): 0.31%.
Of those CEOs receiving cash, single-trigger payments were made to 10%, while 77% received double-trigger payments. A total of 12.1% of CEOs received a combination of payments that included both single- and double-triggers. In these mixed-trigger instances, single-trigger payments ranged from 0.46% to 94.7% of the total cash payable, with the mean single-trigger payment being 24.6% of the aggregate cash value.
The Financials sector had the most CEOs receiving single-trigger cash payments with 103, or 32.4% of that sector’s CEOs. The largest average single-trigger cash payments were in the Consumer Discretionary and Energy sectors with $7.37 million and $7.05 million, respectively (Table 8).
CEOs Receiving Single-Trigger Cash Payments by Sector.
The Financials sector also saw the most NEOs receiving single-trigger payments with 261, or 26.77% of that sectors NEOs paid upon consummation of the acquisition. The largest average payments were made to NEOs in the Consumer Discretionary sector where executives averaged $2.74 million (Table 9).
NEOs Receiving Single-Trigger Cash Payments by Sector.
CEOs were rarely the sole recipients of a single-trigger cash payment. With respect to all transactions in which a single-trigger cash payment was made, only 39 CEOs (12.8%) were the lone beneficiary. This fact highlights an “all-for-one” company policy of all executives receiving single-trigger cash payments, as this was displayed in over 87% of M&A deals.
Single-trigger cash payments, while still a minority of all cash payments, have increased throughout this study. In 2011, 16.03% of executives receiving cash got it in the form of a single-trigger. However, with 2016 being an exception, this percentage was higher in all subsequent years.
With the increased disclosure, we would have expected to see a decline in pay practices deemed problematic by firms such as ISS and Glass Lewis, which includes the single-trigger cash payment. There appears to be an ebb-and-flow since the enactment of Say-on-Pay in 2011. In 2016, there is the lowest percentage of both CEOs and NEOs receiving single-trigger cash payments with 16.11% and 13.26%, respectively. However, the following year, the CEOs receiving single-trigger payments peaked at 27.8% and NEOs rose to 23.8% (Figure 5).
Percentage of executives receiving single-trigger cash payments.
The compensation voting results for transactions with single-trigger cash payments display increasing disapproval from shareholders expressed by the compensation voting results. Figure 6 demonstrates that shareholders, while eager to approve the merger, are not so willing to accept the compensation packages that include single-trigger cash payment for their executives. Shareholder approval to consummate the merger ranges from 95.96% to 99.51%. However, the approval for golden parachutes that contain single-trigger cash payments has decreased from 87.80% in 2011 to 75.39% in 2017. This decrease in approval for the compensation vote is consistent with the assumption of shareholders having greater aversion toward these problematic pay practices.
Voting results for executives with single-trigger cash payments.
Single-trigger cash payments, while (a) deemed problematic by advisory firms and (b) fallen out-of-favor with shareholders, have not decreased. This is clearly an area that should undergo further investigation by boards of directors when establishing golden parachute compensation for executives.
Modified Single-Triggers
A hybrid of triggering events is the modified single-trigger. As with the single-trigger, the transaction must be consummated. However, unlike the double-trigger where the NEO must undergo a termination event to take effect, the NEO may voluntarily terminate their employment within a certain time period to become eligible for payment.
Already a rarity under standard CIC practice, in 2010, ISS added the modified single-trigger to its list of problematic pay practices that would warrant a negative voting recommendation. 9 Companies that seek to extend or grant new modified single-trigger agreements will be unfavorably scrutinized, justifying the reduction of these triggers.
Modified single-trigger payments only occurred in 0.72% of all U.S. public deals between 2011 and 2017. The most frequent occurrence was in 2014 with 5 transactions (2.45%) containing modified single-trigger payments. Only 22 individuals were recipients of 27 forms of modified single-trigger payments: 14 in the form of Cash, 5 for accelerated Equity, 5 Perquisite payments and 3 Other payments. These events only occurred in eleven distinct transactions (Figure 7).
(A) Deals with modified single payments by year. (B) Deals with modified single payments by sector.
Companies in recognized group such as the Fortune 500 and indexes such as the Russell 3000 have reduced the number of modified single-triggers offered to executives. 10 The results of this study are consistent with those findings suggesting the eventual elimination of the modified single-trigger payment.
Payment-to-Equity Ratio
Much of the previous discussion has been with aggregate values among sectors. The need for a metric that will comparably measure merger-related compensation as a function of the transaction equity value is addressed in the Payment-to-Equity Value (PEV) ratio. This ratio provides a measurement that emphasizes the ordinal value, allowing for an executive-to-executive comparison, rather than nominal values that cannot be accurately measured over time periods. The PEV ratio provides the ability to conduct longitudinal peer-to-peer analysis, as readers will not have to take monetary values into account. The following data are based on the PEV ratios for 5,965 executives.
The largest average CEO PEV ratios were in the sectors of Consumer Staples, Financials and Information Technology with 1.83%, 1.75% and 1.64%, respectively. The lowest CEO PEV ratios were in the Utilities, Real Estate and Telecommunication Services sectors with 0.43%, 0.79% and 1.06%, respectively (Table 10). These sector-level averages, in several cases, do not have the underlying data (the Utilities sector in 2012 only had two CEOs included) to account for outlying data that would skew the results. Annual averages were a more suitable alternative for assessing these data as the number of CEOs ranged from 169 to 219.
CEO PEV Ratio by Sector.
Examining the average annual PEV ratio paid to CEOs we only see fluctuating values that peaked in 2013 with 1.56%. Overall, the annual average ratios have trended downward from 1.40% in 2011 to 1.29% in 2017 (Table 10). In tandem with problematic pay practices such as gross-ups and single-trigger cash payments, which have decreased over this survey period, the PEV values demonstrate a decrease in the values paid in golden parachutes over this period.
Equity Payments
Equity payments and equity acceleration constituted much of the value received by executives over this 7-year period. Equity composed between 55.76% and 68.16% of the amount payable to executives (Figure 8).
Equity as a percentage of all payment composition.
The percentage of equity as a payment component has fluctuated peaking in 2015 with 68.16% of payment comprised of equity. Although these percentages have varied over this period, the majority of payment composition has been with equity.
The percentage of executives receiving single-trigger equity payments as part of their golden parachute package has declined over the 7-year period (Figure 9). In 2011, nearly 91% of executives were beneficiaries of single-trigger acceleration. While there have been spikes, such as 2014’s 89.03%, there has been a downward trajectory and only 80.1% executives received this form of payment in 2017.
Percentages of all executives receiving single-trigger equity acceleration.
This decrease in single-trigger equity acceleration is consistent with the other practices (decrease in gross-up and single-trigger cash payments) that have been declining since 2011.
Conclusion
Since the 2011 Say on Golden Parachutes provision to Dodd-Frank, researchers can now accurately assess how public companies compensate their executives in change-in-control situations. Investors, and researchers alike, are now equipped with the ability to interpret the financial gains that executives receive in an M&A transaction. This study has examined 1,524 M&A deals and 5,998 executives to better understand these golden parachute values and triggering events of those takeover targets. The observations presented have provided validity to some basic assumptions made by the author prior to undertaking this analysis. Namely, that certain types of problematic pay practices would experience a decrease.
Company-level changes such as the decreases in both number and percentages of gross-up payments, decreases in single-trigger equity payments and the near elimination of modified single-trigger payments have been addressed.
There have also been shareholder voting changes, namely, the decrease in golden parachute acceptance rates for M&A deals in which executives are the recipients of single-trigger payments and/or gross-ups. These negative votes have not translated into terminated transactions, but with increased pressure from shareholder and the influences of proxy firms, this has the potential to change. It will be interesting to see if further regulatory measures are introduced to hold companies accountable for these negatively viewed pay practices.
The executive PEV ratios tell the reader that payment values, in relation to the transaction values, are on a downward trend. Unfortunately, the question of “Why” is beyond the purview of this study and will inevitably explored in subsequent studies.
The one issue concerning the author is the prevalence of both single-trigger cash payments and single-trigger equity acceleration. Shareholders clearly show disapproval for these payments as evidenced by their lack of support for golden parachute payments, yet these payment types have increased over this period. These latter observations appear to be counterintuitive to the rationale behind the increased disclosure and Say-on-Pay rulings.
Much has been learned over the course of this study, but further research will need to be conducted to gain a better understanding of the long-term effects of increased disclosure and Say-on-Pay requirements.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.