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Severance Trends - Outplacement - The Hay Group


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Description of the topic:
Over the past two years, we have seen how Say on Pay and Dodd-Frank have increased the scrutiny on executive pay to unprecedented levels. Now, more than ever, we need to be mindful of the poor pay practices that can lead a company down a troublesome path. One of the key HR challenges is the development of responsible severance programs that will not cause your various stakeholders to vote against the Company in the Say on Pay vote. The attendees will gain clarity and insight into why these problematic issues exists in pay plans, and how by cleaning them up, the scrutiny will subside, and executive compensation can be used to attract, reward, motivate and retain your top talent while they are with you, and provide a soft landing when they leave your employ.
We will look at some examples of companies where egregious severance package and change in control agreements caused a media uproar, then look at best practices in this area, and wrap up with a look at some organizations that are model citizens when it comes to severance.
This interactive webinar will include open Q&A, interactive polls, and dialogue on the trends and best practices to implement to ensure you are being fair to your employees, shareholders, and the bottom line.
Dan Moynihan, Principal, Executive Compensation

Dan Moynihan is a Principal in Hay Group’s Metro New York office. Dan works closely with Boards and management on programs and plans that help to attract, retain, motivate and focus their top executive talent. Dan works directly with clients to clarify their compensation and human resource objectives to develop programs that maximize their resources and existing infrastructure. His responsibilities include the design and development of executive compensation programs that help to drive attraction, motivation, and retention of key personnel. He advises Boards and executives at number of public and private organizations, including Vitamin Shoppe, 1-800 Flowers, Cape Bank, Central European Distribution Corporation, American Water Works, Charming Shoppes, and GNC. Dan works across multiple sectors, including high technology, financial services, life sciences, healthcare, chemical, consumer products, insurance, manufacturing, and retail.

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Severance Trends - Outplacement - The Hay Group

  1. 1. Severance Trends Sponsored by © 2012 Hay Group. All rights reserved 1
  2. 2. Discussion areas 1 Introductions 2 Overview of current landscape 3 Key considerations around severance 4 The bad and the ugly 5 Good Citizens 6 Next Steps 7 Q&A © 2012 Hay Group. All rights reserved Sponsored by 2
  3. 3. 01 Introductions
  4. 4. Introductions Presenter  Dan Moynihan, CCP, CECP, Principal, Executive Compensation, Hay Group  | 201.557.8423 Today’s Webinar Sponsor  Careerminds  Affordable, virtual outplacement services  © 2012 Hay Group. All rights reserved 4
  5. 5. 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 © 2012 Hay Group. All rights reserved 5
  6. 6. 02 Overview of Current Executive Compensation Landscape
  7. 7. 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 © 2012 Hay Group. All rights reserved 7
  8. 8. What's next? A false sense of security?  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 © 2012 Hay Group. All rights reserved 8
  9. 9. 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:   Elimination of excise tax gross-ups and fewer perquisites   Lower severance multiples in the C-Suite   Double triggers on equity plans 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 © 2012 Hay Group. All rights reserved 9
  10. 10. What to Expect in 2012 and 2013 Companies need to be aware of the “breaking point” for each pay element What Makes Business Sense? Topic 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 performancevested vehicle © 2012 Hay Group. All rights reserved 10
  11. 11. What to Expect in 2012 and 2013 Companies need to be aware of the “breaking point” for each pay element What Makes Business Sense? Topic 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 grossups 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 © 2012 Hay Group. All rights reserved 11
  12. 12. 03 Key considerations around severance
  13. 13. 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) © 2012 Hay Group. All rights reserved 13
  14. 14. 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 © 2012 Hay Group. All rights reserved 14
  15. 15. 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 © 2012 Hay Group. All rights reserved 15
  16. 16. 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 © 2012 Hay Group. All rights reserved 16
  17. 17. 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 © 2012 Hay Group. All rights reserved 17
  18. 18. 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 © 2012 Hay Group. All rights reserved 18
  19. 19. 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 © 2012 Hay Group. All rights reserved 19
  20. 20. 04 The bad and the ugly…
  21. 21. Over $100M in Severance Source :GMI, January 2012 report Company General Electric Exxon Mobil Corp. UnitedHealth Group Inc. AT&T Home Depot Inc. North Fork Bank Merck & Co., Inc./Schering-Plough International Business Machines Pfizer Inc. CVS Caremark Corporation Gillette Co. Target Corporation Merrill Lynch & Co. Inc. U.S. Bancorp Omnicare, Inc. Wachovia/South Trust United Technologies Corporation eBay Inc. WellPoint Health Networks CEO John F. Welch Jr. Lee R. Raymond William D. McGuire Edward E. Whitacre Jr. Robert L. Nardelli John A. Kanas Fred Hassan Louis V. Gerstner Jr. Hank A. McKinnell Jr. Thomas M. Ryan James M. Kilts Robert J. Ulrich E. Stanley O’Neal Jerry A. Grundhofer Joel F. Gemunder Wallace D. Malone Jr. George A. L. David Margaret C. Whitman Leonard Schaeffer Tenure 1981-2001 1993-2005 1991-2006 1990-2007 2000-2007 1977-2006 2003-2009 1993-2002 2001-2006 1998-2011 2001-2005 1994-2008 2002-2007 2001-2006 2001-2010 1981-2004 1994-2008 1998-2008 1992-2004 Severance $417,361,902 $320,599,861 $285,996,009 $230,048,463 $223,290,123 $214,300,000 $189,352,324 $189,005,929 $188,329,553 $185,415,435 $164,532,192 $164,162,612 $161,500,000 $159,064,090 $146,001,476 $125,292,818 $122,631,309 $120,427,360 $119,041,000 XTO Energy Inc. Viacom Bob R. Simpson Thomas E. Freston 1986-2008 2006-2006 $103,485,972 $100,839,772 © 2012 Hay Group. All rights reserved 21
  22. 22. The CEO revolving door The ugly  At Hewlett-Packard  $47+ million in severance payouts while thousands of employees have lost their jobs HP Severance or Sign On $25 $20 $15 $10 $5 $0 © 2012 Hay Group. All rights reserved $21 $12.70 $13.20 $13.10 Severance or Sign On 22
  23. 23. The CEO revolving door The ugly  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 © 2012 Hay Group. All rights reserved 23
  24. 24. Mergers create WEALTH for executives Motorola Mobility/Google  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.   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.   "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.'" 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. © 2012 Hay Group. All rights reserved 24
  25. 25. 05 What a good citizen looks like…
  26. 26. 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   Others have a sunset provision on their severance, so that as tenure increases, severance decreases   Estimated value @ $20.5 Million 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 © 2012 Hay Group. All rights reserved 26
  27. 27. 07 Next Steps for your business
  28. 28. Severance  Review all severance, employment, and change of control arrangements  Consider eliminating employment agreements   Focus on staying under 280G limits   Replace with severance agreements, if possible 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 © 2012 Hay Group. All rights reserved 28
  29. 29. Q&A