The Advisors' Blog

– Broc Romanek, CompensationStandards.com

This WSJ article entitled “Investors Close Golden Parachutes” reports that 4 companies recently lost say-on-golden parachute votes:

Golden parachutes are encountering a stiff wind. Shareholders at four companies have voted in recent weeks to prevent executives from cashing in on certain stock bonuses if their companies are sold, the latest sign that investors are pushing back on the generous pay packages in the event of a merger or sale.

The nonbinding votes at oil refiner Valero Energy Corp., media company Gannett Co., commercial landlord Boston Properties Inc. and Dean Foods Co. come as shareholders have pressured companies to curb severance perks over the past few years, experts say. Regulators, too, have forced companies to disclose more about these payouts. “The golden age of golden parachutes is over,” said Regina Olshan, a Skadden, Arps, Slate, Meagher & Flom LLP lawyer who advises companies on executive pay. Golden parachutes are falling out of favor amid investor and regulatory scrutiny of rising executive pay, especially perks that aren’t tied to a company’s performance. Those concerns can be heightened during merger-and-acquisition deals, when executives can pocket years’ worth of stock grants, options, salary and bonuses all at once.

Defenders of golden parachutes say they can create value for investors. Chief executives of acquired companies often expect to lose their jobs after a merger closes. If they know they will be compensated, they might be less likely to stand in the way of a deal that would pay shareholders a premium. “You want to get to the point where management, from a personal financial standpoint, is indifferent” about a deal getting done, said George Paulin, CEO of Frederic W. Cook & Co., an executive-compensation consulting firm.

Since 2011, shareholders have had a say in how much executives are paid, including golden-parachute payments. “Say on pay” votes are now required by the Securities and Exchange Commission. While they aren’t binding, boards are under pressure from regulators and shareholder-advisory firms to consider investor views when crafting executive-pay packages. As a result, “we’re certainly seeing a more conservative approach by companies” to change-of-control payments, said Dan Wetzel, a managing director at consulting firm Pearl Meyer & Partners.

Cash severance payments, which once commonly exceeded three times an executive’s annual salary and bonus, have been trimmed, experts said. Other perks have all but disappeared. One such example are gross-ups, which obligate a company to pay the high taxes levied on corporate perks, in effect letting the executive take home the full amount. Just seven of the 50 largest U.S. companies allowed tax gross-ups in 2012, down from 21 companies in 2006, according to Pearl Meyer. Mr. Wetzel said the number is likely lower now. In recent months, mall company Taubman Centers Inc., auto-parts supplier Lear Corp. and others have removed gross-ups from their arrangements with senior executives, regulatory filings show. Mel Stephens, Lear’s head of investor relations, said the company’s board believed removing the gross-ups “was in shareholders’ best interests.”

Shareholders have also driven a shift to golden parachutes that only compensate executives who are fired after a merger, rather than agreements that pay out even if the executives keep their jobs. “The appearance of double-dipping” irked some investors, Mr. Paulin said.

Shareholders now appear to be ratcheting up the pressure against a perk that persists: stock awards. Companies often grant top executives shares that vest, or become available, at a future date, and often only if the company hits certain performance goals. But in an M&A deal, these shares can vest automatically when a deal closes, even if the executive keeps his or her job. That is the case at 44% of Russell 3000 companies, according to proxy adviser Institutional Shareholder Services Inc. For example, Matthew Shattock, CEO of liquor producer Beam Inc., received about $20.9 million from previously unvested stock options and awards in the company’s sale to Suntory Holdings Ltd., according to a regulatory filing. Mr. Shattock remains CEO of Beam, which was renamed Beam Suntory Inc. after the sale to Japan’s Suntory closed in April. C. Larry Pope, CEO of Smithfield Foods Inc., received about $18 million from similar perks that were cashed out when the pork producer was sold to a Chinese company last year. Mr. Pope is still the CEO of Smithfield, now a subsidiary of WH Group Ltd. Beam and WH Group declined to comment.

The proposals at Valero, Gannett, Boston Properties and Dean Foods, submitted by organized-labor groups, would prevent unvested stock awards tied to future performance from automatically vesting in a merger. They each received a majority of votes cast but aren’t binding on the companies. Valero, Boston Properties and Dean Foods declined to comment. Gannett didn’t respond to a request for comment.

Amalgamated Bank, the union-owned bank that sponsored the Valero ballot measure, has submitted at least 10 similar measures at other companies since 2010, according to regulatory filings. But none has passed until this year, said Scott Zdrazil, the bank’s head of corporate governance. Similar proposals have failed at other companies this year, including Honeywell International Inc. and Avon Products Inc. “We’re not opposed to some sort of severance, but we are concerned about the size of the cherry on top of the cake,” Mr. Zdrazil said.