Pro-Rata Vesting Linked To Performance
Amalgamated Bank introduced resolutions in 2011 stating that some type of severance may be appropriate, limiting accelerated vesting so it is linked to the executive’s performance, Zdrazil mentioned.
“We started calling for pro-rata vesting where presumably—under a three-year performance period where a change-in-control occurs in year one and the executive loses his or her job—the company could pro-rate a third of the unvested measure of performance,” he said.
“And if the performance is stellar, the executive could get a good amount of equity,” he continued. “Our objective is to avoid the risk of huge golden parachutes that have no relation to the actual performance delivered.”
According to Bowie, if ISS clients are voting on a change-in-control transaction, they are also separately voting on terms the company includes for golden parachute payouts for the top five executive officers.
“…Investors have been rarely inclined to vote against the golden parachute proposal if they are supporting the transaction,” Bowie explained. “This is the purpose of the proposal, one that has been lost. It could be unfortunate because companies do pay attention to what they hear from shareholders through this vote. And, it may well be since they are not hearing much, it’s just business as usual.”
Zdrazil said Amalgamated Bank has been working to close out a “significant loophole” on Pay-for-Performance which relates to golden parachutes.
According to Zdrazil, 92 percent of Fortune 200 CEOs have provisions for accelerated vesting. Of this, 75 percent to 90 percent of CEO compensation comes in the form of equity compensation that is routinely described in proxy statements as “at risk and linked to performance.”
“One of the remaining aspects challenged through Pay-for-Performance is that equity awards and pay plans routinely come with provisions stating that if the company is taken over, all of the performance criteria can be disregarded and thrown out the window,” he said.
Back To The Intended Purpose
McCormick said there are situations where boards and shareholders can find golden parachutes “very useful.”
This is particularly true in the case of mergers when one of two CEOs is dismissed. In this case, boards want both to stay during the initial transition when plans are finalized, up to and past the formal vote when shareholders ratify the merger deal. This continuity is helpful in protecting shareholders as companies move through the uncertainties of a merger or acquisition.
“I think that’s a valid [point]. Because a company suddenly loses someone who has so much knowledge, and if he or she has an offer elsewhere it will assure those with a vested interest that he or she will stick around to successful completion of the transaction,” he said. “So, I think in this example, a reasonable golden parachute could make sense. That’s an incentive, one that benefits shareholders.”
According to McCormick, Glass, Lewis & Co.’s set of guidelines recommend a stronger vote on golden parachute limitations, which are analyzed on a case-by-case basis.
The guidelines take into account multiple factors—the nature of the change-in-control transaction, the ultimate value of payments compared to the value of the transaction, tenure and position of the executives in question before and after the transaction, new or amended employment agreements entered into in connection with the transaction and the type of triggers involved.