March 19, 2014
Many companies provide for the accelerated vesting of equity previously granted to their executive officers in connection with a change in control (CIC) of the company. Such acceleration usually takes place either immediately upon the consummation of an ownership change (single trigger), or is conditional upon the executive’s termination within some specified time interval thereafter (double trigger). Change-in-control provisions, including the equity acceleration triggers examined herein are meant to protect or at least compensate executives in the event of an acquisition. We examine the prevalence of change-in-control equity acceleration triggers for CEOs of 92 Fortune 100 companies that have been disclosed since the 2008 fiscal year. We also examine the theoretical reasoning that underlies the different plan designs.
Single and double trigger plans come with different costs and benefits (as outlined below) that companies consider when formulating their change in control provisions. One issue that arises during any effort to evaluate overall trends in change-in-control plan design is the relative rarity of takeovers, especially among the country’s largest companies. Companies that consider a takeover in their best interests often differ considerably from those companies for which a takeover would be either very difficult or officially discouraged. Readers should bear this in mind when examining the data below, which include only the country’s largest companies.
Companies continue to adopt double triggers. Since 2008, the number of double trigger acceleration provisions in the 92-company sample increased from 17 to 45.
Single trigger acceleration is increasingly rare. Since 2008, the number of single trigger acceleration provisions in the sample fell from 43 to 17.
The largest companies often eschew change-in-control provisions. The median revenue of sample companies without change-in-control provisions was $108 billion in 2012, roughly twice as high as companies that disclosed CIC plans.
Single Trigger Acceleration
Single trigger plans include the obvious cost of accelerating an executive’s equity regardless of whether the executive is terminated, but can also provide executives with a powerful incentive to oversee a smooth, shareholder-friendly transition with a large share-price premium. Since the value of a single trigger payment depends directly on the share price in place at the time of a takeover, executives have good reason to ensure that takeovers proceed smoothly. This incentive should lead, in theory, to a higher share price premium upon takeover under single trigger plans. The value of a single trigger plan depends critically on how large one expects the associated premium to be compared to the premiums of other forms of conditional acceleration. For companies seeking such a transaction to begin with, many of the risks that accompany single trigger acceleration are mitigated, and such a plan has the potential to be a very useful tool.
Double Trigger Acceleration
Many companies prefer double trigger acceleration of equity, because it can help to prevent situations where unsuccessful executives receive large payments upon takeovers that are more a result of decline in firm value than of any valuable services performed for shareholders. Double triggers prevent executives from receiving payment for a takeover while also receiving salary and awards, but still allow compensation for executives being pushed aside during a takeover. As a result, such executives still have a reason to willingly participate in the change in control. Thus, such triggers are generally viewed as the more shareholder-friendly option for most companies that have no immediate takeover threat. Since vesting of outstanding equity is contingent on continued employment (assuming the executive is not terminated without cause), double trigger plans help to provide protection for executives in the event of a termination caused by the acquisition.
As noted below, the data demonstrate a rise in the number of double trigger plans between 2008 and 2012, almost entirely to replace single trigger plans. The number of companies mixing single and double triggers, exercising committee discretion, or not providing for change-in-control benefits remained roughly constant over the period.
Prevalence of Change-in-Control Equity Triggers
Sample companies that do not disclose any change-in-control vesting acceleration plans are considerably larger than other companies as measured by revenue. None of the seven largest companies within the Fortune 100 disclose policies regarding change-in-control vesting acceleration. When measured at the median, Fortune 100 companies without such plans are roughly twice as large as their Fortune 100 counterparts. Larger companies are generally less likely to experience takeovers than smaller ones, and therefore have lower expected gains from adopting a change-in-control plan.
2012 Median Revenue by Trigger Type
Proxy Advisor Positions
Although neither Institutional Shareholder Services (ISS) nor Glass Lewis state that a single trigger plan will automatically result in an “against” recommendation, both make it clear that they view the single versus double trigger issue as an important factor in making their decisions. ISS, in particular, suggests in its policies that double trigger vesting of equity awards is currently the best market practice.
Institutional Shareholder Services
“Does the presence of single trigger vesting acceleration in an equity plan result in an automatic AGAINST recommendation for the plan, the say on pay vote, the entire compensation committee, or the full board?
There are no ‘automatic’ negative recommendations under ISS policy. We will consider all relevant aspects included with the company’s ultimate disclosure. With regard to equity-based compensation, ISS policy encourages ‘double trigger’ vesting of awards after a CIC (considered best practice).”
On a similar note, Glass Lewis previously addressed golden parachute arrangements in its World Governance Focus and suggested that single trigger payments may not be in the best interests of company shareholders.
“In the case of each golden parachute arrangement Glass Lewis recommended against, more than 60% of the payments were to be received whether or not executives were terminated in the event of a change-in-control. While this single factor is not by itself sufficient for Glass Lewis to recommend against a proposal, we do consider arrangements that rely heavily on single-trigger payments to be against shareholders’ best interests.”
Among Fortune 100 companies that changed from single to double equity triggers in the last five years, certain companies explained in their annual proxy filings the rationale behind eliminating single triggers as part of the change-in-control benefits. Both Merck and Marathon Petroleum elaborate on their decisions in the following disclosure examples:
DEF 14A filed on April 12, 2010
2010 Change in Control Enhancements
For grants made by New Merck in and after 2010, the Committee adopted a double trigger treatment which generally requires a change in control followed by a qualifying termination of an executive’s employment. In making this change, the Committee was guided by dialogue with shareholders and evolving market practices.
Each of the Change in Control plan benefits is intended to work together as a retention device during change in control discussions, especially for more senior executives, in a marketplace where similar benefits are common. Executives are eligible for Change in Control benefits only in the event of a qualifying termination following a Change in Control; the Change in Control plan does not contain a so-called ‘single trigger’ or ‘walkaway window’ that entitles executives to resign for any reason following a change in control and receive severance benefits.”
Marathon Petroleum (MPC)
DEF 14A filed on March 14, 2013
Eliminated the single-trigger feature of our executive change in control severance benefits plan for accelerating the vesting of new unvested equity awards.
Reason for Action
To align with best practices and the long-term interests of our shareholders by requiring both a qualified termination as well as a change in control of the Company (or a double-trigger) in order for unvested awards to vest."
On the other hand, DIRECTV received a shareholder proposal submitted by the Board of Trustees of the International Brotherhood of Electrical Workers’ Pension Benefit Fund related to its existing double trigger plan that suggests the company either does not let any unvested or unearned equity awards accelerate, or only accelerates such equity awards on a pro-rata basis after a qualifying change-in-control termination.
DEF 14A filed on March 22, 2013
RESOLVED: The shareholders ask the board of directors to adopt a policy that in the event of a change in control (as defined under any applicable employment agreement, equity incentive plan or other plan), there shall be no acceleration of vesting of any equity award granted to any senior executive, provided, however, that the board's Compensation Committee may provide in an applicable grant or purchase agreement that any unvested award will vest on a partial, pro rata basis up to the time of the senior executive's termination, with such qualifications for an award as the Committee may determine. […]
We do believe, however, that an affected executive should be eligible to receive an accelerated vesting of equity awards on a pro rata basis as of his or her termination date, with the details of any pro rata award to be determined by the Compensation Committee.
Other major corporations, including Apple, Chevron, Dell, ExxonMobil, IBM, Intel, Microsoft, and Occidental Petroleum, have limitations on accelerated vesting of unearned equity, such as providing pro rata awards or simply forfeiting unearned awards.”
Elkinawy, S. and Offenberg, D. (2013), Accelerated Vesting in Takeovers: The Impact on Shareholder Wealth. Financial Management, 42: 101–126. doi: 10.1111/j.1755-053X.2012.01202.x