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Apr 10, 2014

Shareholders pushing back more against executive pay & severance

Boards of directors need to be ready to discuss not only executive pay but severance policies during shareholder engagement sessions 

The idea of shareholder-driven direct democracy is being hotly debated in the governance arena. Shareholders are flexing more muscle this proxy season when it comes to executive compensation and insisting on more say about golden parachutes as well.

Last week in Canada, Barrick Gold announced an overhaul of its executive compensation policy ‒ the result of extensive talks between the board’s compensation committee and shareholders representing more than 30 percent of Barrick’s outstanding common shares. From now on ‘participating executives will be assessed on their collective performance, as measured against a transparent scorecard disclosed to shareholders in advance,’ the mining company states in a news release. That scorecard is based on eight performance measures, including return on invested capital, dividends to shareholders, capital project performance and free cash flow. Barrick said scores will be published at the end of each year, ensuring a transparent process.

Executive severance packages are also in investors’ crosshairs. One of two shareholder resolutions the Association of BellTel Retirees has filed with Verizon calls for the board to get shareholder approval of senior executives' severance or termination payments above 2.99 times base salary plus bonus. Roughly 70 percent of the association’s 128,000 members own Verizon shares, mostly through retirement savings plans, says C William Jones, the association’s president.

BellTel retirees have been at this since 1998. On their sixth attempt in 2003, their proposal garnered 59 percent support from shareholders but, according to Jones, Verizon didn't follow through with requested changes. ‘So we filed again, but we made it a binding proposal’ ‒ which prompted Verizon’s board to adopt a policy requiring shareholder approval of severance agreements whose cash value exceeds 2.99 times a senior executive’s base pay plus bonus, in exchange for the proposal being withdrawn, says Jones.

That policy excluded equity awards from the cash value calculation, however. Now, 10 years later, the association is pushing for the board to update its policy to include the value of any stock awards in the 2.99 times base pay plus bonus calculation.

In recommending that shareholders vote against the proposal in its proxy statement, Verizon said the board’s human resources committee disagreed that payments under outstanding equity awards after termination should be characterized as severance payments and said ‘it would be inappropriate to include an estimated value of these amounts in the severance calculation because they are earned by the executives during the course of their employment.’

Verizon further defended its current policy by citing the 'double-trigger' change in control provision in its long-term incentive plan, which accelerates payment of unvested performance and restricted stock units if, within 12 months of a change in control of Verizon, an executive's employment is terminated without cause. It said the committee sees this being in shareholders' best interests because it ensures ‘employees do not have to worry about potentially losing a substantial amount of their compensation by supporting a transaction that is in the best interests of Verizon's shareholders.’

A recent survey by Alvarez & Marsal Taxand shows severance multiples and excise tax gross-ups are being reduced or phased out thanks to shareholder pressure. Investors are becoming more aware of companies that, because of their compensation plans, would be seen as outliers relative to their peers, says Robert Newbury, director of executive compensation resources at Towers Watson. Severance multiples beyond three times would be considered above market and companies have gradually been eliminating excise tax gross-ups in severance programs, he says.

It seems clear directors need to be ready to discuss not only executive pay plans but also the rationale for certain severance policies when they engage with shareholders.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary