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Incentivizing Risk: Cash Severance Multiples among U.S. REITs
March 8, 2016
In addition to attracting talent and providing retention value, severance packages can incentivize
executive risk-taking by providing a safety net in case certain decisions don’t turn out as planned.
One study found that “CEOs with contractual protection are protected from short-term performance
swings” (Chen) and are thus more flexible to take short-term risks that may lead to long-term rewards.
Cash severance in particular, because its value is not affected by the stock market, guarantees a
minimum level of compensation after a termination without cause or resignation for good reason scenario
that may immediately follow a decline in company performance.
In a recent study of CEOs at 110 U.S. real estate investment trusts (REITs), Equilar found that 93
companies (84.5%) provided some form of cash severance. Cash severance was defined to be any cash
payment that an executive would receive other than what is already owed to him or her. This does not
include accrued salary, bonus payouts or vacation pay.
Out of the 93 companies, 91 expressed cash severance as a multiple of base salary. The remaining two
companies provide cash severance in the form of a fixed dollar amount. Furthermore, of the 91 companies
paying a salary multiple, 76 (83.5%) also provide a multiple of the executive’s annual bonus which is
paid on top of the salary multiple.
As the data shows, CEO cash severance multiples among these REITs are typically in the range of 2x to
2.99x. Breaking it down even further, the majority of companies are at the low end of that range—37 of
them pay base salary multiples of 2x, and 32 companies pay annual bonus multiples of 2x. Also interesting
is that only one company out of the 74 comprising the annual bonus chart pays a bonus multiple that is
different from the cash multiple. In that case, salary is 3x and bonus is 2x. Taking this into consideration,
it is possible to compare these charts and see that companies at the high end of the spectrum are more likely
to pay both a salary and bonus multiple. In fact, 26.8% of companies paying salary multiples below 2.5x do not
pay bonus multiples. Comparatively, only 5.7% of companies paying salary multiples of 2.5x or higher do not pay
bonus multiples.
* Only 74 companies appear because we excluded two companies that pay a bonus amount that is dependent on
the length of the remaining term of the CEO’s employment agreement.
Source:
Chen, Xia and Cheng, Qiang and Lo, Alvis K. and Wang, Xin, CEO Contractual Protection and Managerial Short-Termism
(November 1, 2014). The Accounting Review, September 2015, Forthcoming.
Available at SSRN:https://ssrn.com/abstract=2557740
For more details on corporate transaction pay decisions and disclosure, or to learn more about custom
research available through Equilar’s Research Services, please contact
the Equilar research team at research@equilar.com.
For more information on Equilar’s research and data analysis, please contact Dan Marcec, Director of Content &
Marketing Communications at dmarcec@equilar.com. Charlie Pontrelli,
research project manager, contributed to this post.