O’Brien said Marco Consulting Group prefers vesting on a pro-rata basis and that severance be under three times the base salary and bonus. She also wants to ensure that—upon payout—the executive leaves the company and doesn’t receive severance for continuing on.
“Executives shouldn’t walk away with a windfall solely because a change of control occurs,” she said. “That’s not a good use of shareholder resources.”
Malizia agreed and said the Teamsters have a similar philosophy.
“We think it’s fair to the owners of the company and to the sustainability of the company that those packages should be pro-rated,” Malizia said. “If the reason for exit is something performance based, for example, the executive accomplished only 20 percent of his or her intended mission, then the executive should receive only 20% of compensation from a golden parachute.”
Shareholders Want To Approve Golden Parachute Provisions
Shareholders have filed proposals stating that if a board is going to pay out a golden parachute, they must seek shareholder approval beforehand, similar to Kindred HealthCare’s plan, according to O’Brien.
Malizia said the proposals filed by the Teamsters ask for a vote whenever payout terms exceed three times annual salary and bonus.
“When that’s being offered to an executive, we feel that the shareholders should have the right to approve or disapprove such a pay package,” he said.
ISS’s general principle is that awards should not automatically vest in cases where there is a change in control. They generally focus on the structure of the package rather the magnitude of the payout. This means in cases whether the cash payment is within the bounds of market practice, meaning no more than three times the salary in bonus.
“For example, we look for things such as, ‘Did the company give the executives certain extra grants—maybe unusual grants outside of their normal timing for equity grants—in the run up to the merger?’” said Bowie. “In other words, are executives loaded up with extra equity that is going to automatically vest when a change in control happens?”
She said they also want to see if a company is paying out performance-based awards at 100 percent. Meaning, there is no acknowledgement of performance conditions or the time lapsed in the performance period.
For O’Brien, it’s not that companies should remove equity, or refuse to grant executives severance.
“Evaluate the situation and keep shareholders in the loop, and then award equity according to what is deserved,” she said.