Anti-Accelerated Vesting Emerges
On April 1, 2015, the Council of Institutional Investors (CII) proposed a policy regarding accelerated vesting, part of which calls on company boards to disclose reasons for awarding accelerated vesting in full. This is an effort by shareholders to move boards away from awarding unearned equity—based upon performance.
“CII Opposes Automatic Accelerated Vesting of Unearned Equity” has refocused the conversation on severance packages and the golden parachutes that sometimes follow. According to the press release, CII “[aims] to add momentum to the growing trend among US companies to end automatic full vesting.”
The policy is one of many regarding executive compensation introduced to the market over the past 35 years that directly addresses automatic full vesting and attempts to curb the use of golden parachute arrangements, among other goals.
Carol Bowie, head of research for the Americas at Institutional Shareholder Services (ISS), acknowledges there is a rationale for golden parachutes—specifically change-in-control related golden parachutes. This includes genuinely concerned investors worrying about their portfolio values, and seeking assurance that executives won’t be biased against attractive takeover offers.
“So the reason for the golden parachutes in the first place was, ‘Let’s give [executives on their way out] a little cushion of economic security so they will view any offers to buy out their company objectively rather than putting their own futures first,” she said.
Shareholders Want Tighter Scrutiny Of Golden Parachutes
Bowie added that in light of shareholder concerns with golden parachutes, the use of golden parachute-style arrangements should be brought under tighter scrutiny by boards.
“They are very standard components of executive pay packages. We have seen very clear demarcations, I would say, in what are common core terms of golden parachutes,” she said. “These are the severance payouts that are made in connection with the change in control of the company. But we still see some excessive enough to potentially incentivize deal-making. The whole concept spilled over into severance contracts unrelated to change-in-control. Some may be viewed as ‘pay for failure’ if an executive ends up leaving due to poor company performance.”
McCormick said companies see the value of golden parachutes and believe using them protects shareholders. Companies may feel such provisions may be appropriate rewards for long-serving employees, and may protect shareholder value by promoting retention.
But McCormick added that the federal tax provision IRC Code 280g impacted the standards set for golden parachutes.
“Legislation and the consequences of IRS Rule 280g set the ceiling rather than the floor for golden parachutes,” he said, referring to the maximum three year payout benefit. “It became almost like, ‘Well this is what is allowed, so let’s allow this, because other companies are doing it.’”
Golden parachutes, O’Brien said, are a red flag Marco Consulting Group takes into account when evaluating a board, though they run across them less and less often.
“The golden parachute is an executive perk we view as excessive when evaluating compensation plans,” she said.
Zdrazil said he has filed multiple successful resolutions on behalf of shareholders, including at Anadarko Petroleum, EOG Resource, and elsewhere.
He adds that Amalgamated Bank—the only U.S. union-owned bank—has a track record of success in shareholder engagements, receiving 56 percent support of a resolution on automatic vesting brought to Valero in 2014 – a percentage he is pleased with. “But it raises the question of who are the other 44 percent who think it’s a good idea for a company to agree to automatically pay out a full equity award regardless of the performance delivered by the executive,” he said.
In addition, in 2011 a related resolution at Occidental Petroleum was adopted in full.