A US golden parachute proposal is a shareholder advisory vote on compensation that becomes payable to Named Executive Officers (NEOs) following a change of control event. These votes typically accompany a merger, business combination, or other transaction, and they allow shareholders to have a say in the executive compensation payments related to the transaction, such as an advisory vote on pay in a an annual meeting of shareholders. Like an advisory vote on pay, the golden parachute vote is advisory in nature and its adoption is generally not necessary for the underlying transaction to occur.
Golden parachute disclosure rules require companies to disclose in tabular form an estimate of the total value of cash severance, accelerated equity, perquisites or continuing benefits, pensions or other ineligible deferred compensation, excise tax payments or any other payments from named executive officers. (such as a retention bonus or a transaction bonus). Cash severance and stock acceleration benefits can take several forms, including:
- Single trigger: cash severance or stock vesting occurs automatically upon a change of control;
- Dual trigger: a qualifying termination must occur in connection with a change of control for payments to be made or the acquisition of shares to occur; Or
- Modified Single Trigger: Voluntary resignation as part of a change of control can trigger cash payouts or stock vesting.
Companies disclose how each Named Executive Officer’s cash severance is determined, which is generally calculated based on a multiple of annual base salary and/or annual bonus. Companies also disclose outstanding stock awards held by executives, which may also have modified one-, two-, or single-trigger vesting provisions. The treatment of performance equity awards is also disclosed, including whether the award was pro-rated and at what level of performance the equity will vest.
While a merger proxy includes details regarding the golden parachutes of all named executives, the analysis below focuses on the CEO’s golden parachute agreements, as these are typically the largest component of CEO payouts. a company’s golden parachute and are subject to greater scrutiny by investors.
Golden Parachute Failure Rate
Recent golden parachute failure rates have increased amid surge in golden parachute scale
The number of U.S. corporate change of control transactions that were voted on with a golden parachute proposal remained stable from 2017 to 2022, ranging from 146 to 178 proposals, excluding 2020 which only had 87 submissions (presumably due to the onset of the COVID pandemic). From 2017 to 2021, the median CEO Golden Parachute values did not fluctuate significantly, ranging from $7.5 million to $8.5 million. The golden parachute failure rate fell to 10.3% in 2020, but remained between 11.6% and 14.5% for the rest of this period.
2022 has seen a change in both areas, however. Golden parachute values have skyrocketed in 2022, with the median CEO golden parachute reaching $12.9 million, a 62% increase from the previous year’s value of $7.9 million. Along with the increase in the value of the CEO’s golden parachute, the failure rate of golden parachutes also increased to a six-year high of 15.6%, from 11.8% the previous year. Shareholders appear to be aware of the full extent of the golden parachute and may vote against golden parachute proposals on that basis.
Golden Parachute values for failed and passed votes
Total median golden parachute values were significantly higher for failed votes
The median values of total CEO payouts for failed golden parachute proposals in 2021 and 2022 were similar at $18.3 million and $18.9 million, respectively, but over the two years the proposals that were accepted were significantly higher than the median values of total CEO payments ($6.8 million and $11.6 million in 2021 and 2022, respectively). This stark contrast in median values strongly suggests that the magnitude of golden parachute compensation is an important voting factor for a significant number of investors.
Stock Values in Golden Parachutes
Stock values accounted for a higher percentage of golden parachutes in 2022
A breakdown of compensation elements for failed golden parachute proposals indicates that equity value accounted for a greater proportion of the CEO’s total parachute payouts in 2022 compared to the previous year. The median accelerated equity value for CEOs increased 22% from $11.4 million in 2021 to $13.9 million in 2022. Equity values for 2022 accounted for 63.4% of the total payouts to CEOs in such cases, up from 52.9% in 2021.
Meanwhile, the median value of CEO cash severance packages among rejected proposals fell 20.5% year-over-year, from $7.0 million in 2021 to $5.5 million in 2022. Additionally, the median value of excise tax surcharges payable to all NEOs at companies whose golden parachute proposals failed increased from $8.9 million in 2021 to $5.5 million in 2022. Excise tax increases, which are payments to executives to cover any excise tax triggered by an excess parachute payment, can result in substantial increases in termination payments potentials. Shareholder opposition to excise tax increases has led most companies to eliminate them and is considered a problematic compensation practice. The year-over-year decline in the value of these payments may be a positive indication that companies are continuing to move away from this practice.
Problematic fairness practices
Problematic equity practices top list of ISS benchmark policy concerns identified in 2022
The ISS recommended voting “against” 34.4% of all golden parachute proposals under the U.S. baseline policy in 2022, up from 28.7% in 2021. Majority support, in both 2021 and 2022. The percentage of all votes rejected with single-trigger stock vesting increased significantly year-over-year, from 57.1% in 2021 to 70% in 2022. In each case, the acquisition of single-trigger shares was not the only concern identified; The ISS cited multiple concerns in three-quarters of all failed golden parachute proposals in 2021 and 2022.
The second most common problematic practice identified by ISS in 2022, at 35% of all votes rejected, was the acceleration of unvested performance shares above target levels, without compelling justification – i.e. instances where vesting was not based on actual performance and insufficient justification was disclosed for vesting above target. Of the seven instances where above-target acceleration of performance shares was cited as problematic in 2022, six were associated with the vesting of single-trigger shares. The 35% of failed votes from 2022 where above-target performance stock acceleration was cited by ISS represented an increase from 2021, when 28.6% of all failed votes cited this reason. Such above-target acquisition, especially at max levels, can significantly increase overall golden parachute payouts.
Excise tax increases, special allocations and problematic severance provisions
Additional concerns included excise tax mark-ups, special allocations and problematic cash severance provisions
Paying excise tax mark-ups continued to be a common concern cited by ISS in the failed 2021 and 2022 golden parachute proposals. Many investors have frowned on this practice for years, leading most companies to adopt policies against markups. In 2022, ISS cited excise duty markups as a concern in 35% of all golden parachute proposals that failed, down slightly from 38.1% in 2021. Problematic special awards, which included transaction or retention bonuses that were disproportionate or paid on a single trigger, were cited less often as a concern in 2022, with only 20% of all votes rejected compared to 38.1% in 2021. Finally, indemnities Single-Trigger or Modified Single-Trigger (excluding Special Rewards) Cash Starters were cited in 2022 at 20% of all rejected proposals, down slightly from 23.8% in 2021.
The 2022 peak in the median CEO golden parachute value coincided with an increase in the golden parachute failure rate. The magnitude of golden parachute payouts appears to be a significant factor in many investors’ voting decisions, further evidenced by the stark difference in median golden parachute values between failed and accepted proposals. For failed proposals in 2022, the average cash payout value declined while equity values accounted for a higher proportion of total CEO parachute payouts compared to 2021, and problematic equity acceleration emerged as a more widespread concern. Concerns identified in 2022 indicate potential issues with single-trigger acceleration, coupled in some cases with above-target acceleration of performance actions; in other words, the terms under which CEOs would receive a significant portion of their golden parachute payments—on a one-time trigger basis with potentially enhanced amounts—likely played a role in driving up the failure rate of the golden parachute in 2022 The treatment of equity in severance packages, coupled with increasing scale, remains an important area of concern for many shareholders and one that ISS will continue to monitor.