In mergers and acquisition environments where surveillance is high and single change-in-control (CIC) provisions can lead to “opposite” recommendations from proxy advisors, outdated “golden parachute” arrangements can be quickly distracted or even worse, blame. While the Commission still needs to maintain and protect executives during the transaction, today's market-leading practices reflect a disciplined approach that reflects the direction of external markets and policies of large asset management companies and proxy advisory companies. The goal is to ensure that CIC protection is economically neutral about potential transactions and aligns with shareholder expectations and governance norms. Below we outline five methods that have become standard practices for CIC protection, while maintaining effectiveness and fairness. [Note: All statistics are from Meridian’s 2023 Study of CIC Severance Arrangements, which looks at all constituents of the S&P 500.]
1. Suppress multiples of retirement
Investors are increasingly expecting retirement benefits to be paid when their retirement benefits reflects actual losses rather than being blown away by cash. Third-fold base salary + bonus cash retirement was once the main standard for CEOs, but now the prevalence is split more evenly between 3x (47%) and 2x – 2.5x (42%). Other NEOs usually receive a double base + bonus. Additionally, while target bonuses are still the most common way to define the amount of bonuses used in cash retirement calculations, some designs use the average of base salary and actual bonus payments over the past three years to calculate retirement. This reflects a more accurate estimate of the value the executives have lost.
2. Double trigger equity is standard
The era of automatic (“single trigger”) equity acceleration when trade closures is largely over. Most companies (over 90 percent) follow a “double trigger” approach, stocks only grant rights if there is a CIC and a qualified termination within a defined window (usually 12-24 months after trading). This practice is now considered standard by proxy advisors and institutional investors, with single-trigger perks being routinely flagged by the ISS as a problematic salary practice. Companies should consider phased out legacy arrangements with single-trigger vesting and redesigning stock award agreements with double-trigger clauses.
3. Clarify the definition of “cause” and “justified reasons”
Modernizing the arrangement of CICs is not just quantum and structure, but also language. There are examples of legacy contracts that include vague or broad definitions of termination of employment of “cause” and “justice reasons”, which could lead to disputes, unintended payments, or adverse governance optics. Today, about 70-80% of businesses rely on standardized CIC contracts or retirement plans rather than individual employment contracts. To mitigate risk and enhance governance integrity, companies should consider reviewing and updating these definitions to reflect objective, clear, and market-aligned definitions.
4. Eliminate the total tax amount of 280g
There are few outdated provisions as the total amount of the Internal Revenue Code Section 280G tax, or as inflammatory or inflammatory. These provisions provide cash payments to executives to cover all excise tax-related expenses on CIC payments. These payments are currently considered red flags by proxy advisors and investors. Therefore, only 5% of businesses maintain full or revised taxes. Instead, today's standard approach is “best net.” This ensures that management (a) a full CIC payment with applicable excise taxes paid by executives, or (b) a reduction in retirement amounts that avoid sales tax.
5. Please be transparent about your legacy contract
The board sometimes inherits legacy CIC arrangements that may include a single trigger or excise tax sum. If these provisions cannot be excluded immediately, we will clearly disclose them and demonstrate our intention to step-by-step. Proxy Advisors are more tolerant when clear migration plans are communicated.
CIC retirement arrangements are essential to working with executives with shareholders during the company's sales and maintaining executives throughout the process. Market-leading designs protect only when protection is needed and follow clear and consistent triggers. With the right structure in place, businesses can provide purpose to parachutes, maintain talent, minimize external scrutiny, and close trades without headlines.
