A Creative Approach to Severance and Change In Control Multiples
“Pay for failure” without a doubt is one of the more toxic topics when discussing executive compensation. When attracting a new executive, balancing “downside protection” vs. “over-the-top party favor” has its own set of unique challenges. If an executive is a top quartile performer, companies are making every effort to retain their top talent. Given the competition for top quartile talent, odds are stacked against companies in attracting new star performers unless they offer something either
(i) truly unique or (ii) a very compelling risk reward opportunity.
In preparation for a recent presentation for the HR Policy Association and a webinar on severance and change in control practices, one of our analysts came across a great example from the employment contract for the CEO at Cardinal Health (CAH). In this example, the multiple of base salary and bonus that CAH pays to Kerry Clark decreases the longer he is with CAH. By having a variable multiple tied directly to tenure, this protects the executive early in his new position.
“the Company shall pay to the Executive in 24 equal monthly installments, the amount equal to the product of (1) a fraction, the numerator of which is the number of days from the Date of Termination until June 30, 2009 and the denominator of which is 365, and (2) the sum of (x) the Executive’s Annual Base Salary and (y) the Reference Bonus; provided that such amount shall not be less than 1.5 times the sum of the Annual Base Salary and the Reference Bonus;”
Employment Contract dated April 17, 2006
So what does this actually mean? The chart below illustrates how the severance multiple for the CEO declines over time.
If Mr. Clark or the board realizes that this isn’t the right gig for him early on, he is protected with a 3x or greater severance multiple. But over time, as he gets settled into his position, the multiple gradually declines and bottoms out at 1.5x. By having this built directly into his employment contract, this arrangement addresses a major concern of many shareholders.
I hope people find this example to be of interest. If you know of other interesting and unique examples, please let us know.No tags for this post.