Time is Right to Rethink Executive Severance and Change-In-Control Agreements

In an article in the latest Watson Wyatt Insider newsletter, consultants Ira Kay, Ph.D. and Steven Seelig, J.D., LL.M., urge companies to rethink their severance and change-in-control provisions and, as necessary, adjust them to better reflect their original purpose and intent as well as shareholder interests.

Today's climate of heightened sensitivity around and attention to executive compensation is bringing new scrutiny of severance and change-in-control packages.  Further, recent surveys by Watson Wyatt indicate that most institutional investors (64% for executive change-in-control agreements and 74% for executive severance plans) view these arrangements as "shareholder unfriendly".

With all of this in mind, Kay and Seelig provide a detailed history and overview of these agreements, and offer recommendations for rethinking and adjusting them.  The authors summarize their position in the following thoughts:

To get the most value from change-in-control and severance provisions, compensation committees must carefully balance the cost of providing specific incentives with their likely results.  Used properly, change-in-control and severance provisions can elicit behaviors that benefit executives, companies and shareholders, without forgoing fiscal restraint.  Boards and compensation committees must think carefully about how and when to implement these provisions.  Those that decide to modify existing compensation programs may need to get some complicated legal issues out of the way first.  For new hires, however, the slate is clean, and we hope that compensation committees will seriously consider these recommendations for their future executive compensation structures.  Shareholders need only to look at their company's proxy to see whether they have.

I could not do justice to Kay's and Seelig's advice with a summary of their thoughts and recommendations, so I urge any readers with interest in or a need to learn more about these arrangements to go directly to the article to read more.