The Securities and Exchange Commission’s recently revised executive compensation disclosure rules introduced several new important areas of disclosure, including: sections on deferred compensation, pension benefits and potential post-employment payments. These new disclosure sections generated a wealth of fresh information during proxy season, and for the first-time, Equilar has performed a comprehensive analysis of potential severance and change-in-control payments for CEOs.

Methodology

Equilar completed an analysis of potential exit packages for chief executives at Fortune 200 companies using information from 137 companies filing compensation data under the SEC’s new disclosure rules. To ensure consistency throughout the analysis, severance compensation is defined as payments arising as a result of termination of employment without good reason or without cause. Change-in-control compensation is defined as payments arising as a result of termination of employment following a change-in-control of the company.

CEO Severance Packages

In 2006, according to disclosures at Fortune 200 companies filing under the SEC’s new rules, 71.5 percent of CEOs are in-line to receive severance payments if their employment is terminated without good reason or without cause. For these executives, the median potential severance payout, as estimated by each company, is approximately $21.0 million.

Total severance payouts are calculated as the aggregate of lump-sum cash payments, the value of accelerated equity, accelerated or continued benefits (including retirement plans and deferred compensation) and tax gross-up payments. With the exception of tax gross-up payments, which appeared for only 4.4 percent of executives, the following chart provides an overview of the median values for each of these elements in 2006:

Among CEOs with potential severance awards in place, the prevalence of disclosure for cash, equity, benefit and tax gross-up values are as follows:

CEO Change-In-Control Packages

In 2006, according to disclosures at Fortune 200 companies filing under the SEC’s new rules, 81.8 percent of CEOs can expect a change-in-control payment if their employment is terminated following a change-in-control of their company. For these executives, the median potential payout, as estimated by each company, is approximately $28.6 million.

Total change-in-control payouts are calculated as the aggregate of lump-sum cash payments, the value of accelerated equity, accelerated or continued benefits (including retirement plans and deferred compensation) and tax gross-up payments. The following chart provides an overview of the median values for each of these elements in 2006:

Among CEOs with potential change-in-control awards in place, the prevalence of disclosure of values for cash, equity, benefit and tax gross-up payments are as follows:

Side-By-Side Comparison

A side-by-side comparison of the key elements which comprise severance and change-in-control packages indicates that change-in-control payments are more likely to include a wider variety of components, and significantly more likely to trigger tax gross-ups. The chart below shows the prevalence of disclosure of values for potential post-employment payment components on a side-by-side basis:

Disclosure Examples

A review of early filers under the SEC’s new compensation disclosure rules shows that companies have adopted a number of methods for displaying post-employment information:

• Narrative discussions of the treatment of various compensation elements under applicable termination scenarios with a focus on how specific company plans will be affected.
  
  See: Baker Hughes Inc. - DEF 14A filed on March 6, 2007 - LINK
  
  
• Tables/Matrices outlining the treatment of various compensation elements under applicable termination scenarios with a focus on how specific company plans will be affected.
  
  See: Coca Cola Co. - DEF 14A filed on March 9, 2007 - LINK
  
  
• Individual tables quantifying the details of various post-employment payouts for executive officers.
  
  See: Wrigley - DEF 14A filed on February 13, 2007 - LINK

Other companies, like Wyeth, disclosed recent amendments to their executive post-employment arrangements in their CD&A. To review the Wyeth proxy, filed on March 16, 2007, click here.

Follow-Up

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