Nearly Half of U.S. Companies With Severance Policies Have Separate Plans for CEOs

Nearly Half of U.S. Companies With Severance Policies Have Separate Plans for CEOs

Nearly Half of U.S. Companies With Severance Policies Have Separate Plans for CEOs>
June 2, 2009 — While many U.S. companies are striving to adapt a uniform approach to severance plans, 51% of companies with severance policies still have a separate plan for the top executive, according to a study released this week by WorldatWork and Innovative Compensation and Benefits Concepts LLC (ICBC), an HR consulting firm. >

The study, Severance and Change-in-Control Practices 2009, reveals that an increasing number of companies are trying to move toward a one-size-fits-all approach for severance plans: 27% said they have one severance plan for all employee levels. And, compared to previous years, fewer companies (32% in 2009 versus 42% in 2007) today offer a three-tiered structure for severance that isolates the top executive, senior executives and all other employees. >

“While there have been some notable examples of excessive CEO severance packages, our research shows that these cases are not indicative of the vast majority of companies,” said Don Lindner, CCP, executive compensation practice leader for WorldatWork.>

When it comes to paying severance to CEOs, 54% of companies defined cash compensation as salary plus bonus and 46% defined it as salary only. Paying 6, 12 or 24 months of cash compensation in a lump sum payment appears to be the norm. Only 1% of companies pay more than 36 months.>
Of those companies whose severance plans for CEOs include a bonus, 53% pay based on the target, not actual, bonus.>

Tax gross-ups — the practice of increasing the amount of a cash payment to offset the tax impact on the individual resulting from the cash payment — are declining. Ninety-two percent of respondents said they do not gross up their executives’ severance pay. In the 2007 survey, only 79% said they did not apply a gross-up.>

In regard to change-in-control (CIC) plans, 44% of organizations have reviewed their CIC policies within the past 12 months, compared to only 27% in 2003. Of those companies that conducted a review, 72% reported that their severance program did not change in the past two years. Of those that reported a change, 15% said they are offering more generous benefits while 13% offer less generous benefits. >
“This survey more than any other that we have completed shows good progress in the area of prudent and careful review of these plans on the part of compensation committees and their HR liaisons in general," said Bob Jones, JD, CPA, CEBS, of ICBC. “We are especially pleased in the uptick in numbers for recent reviews of both types of plans.” >

Finally, benefits continuation in CIC plans rose significantly in 2009: 82% of respondents said they offer their top executive one or more benefits (outplacement, health insurance, dental insurance, etc.) for a continued period of time in the event of an involuntary termination, non-CIC severance or not-for-cause situation, compared to only 57% in 2007.>

Survey methodologyThe survey was conducted in April 2009. Surveys were sent electronically to a random representative sample of 4,986 U.S. WorldatWork members. A total of 750 members participated in this survey, generating a 15% response rate. This high response rate and a similar demographic profile between survey respondents and the general WorldatWork membership provides a high level of confidence regarding the validity of the data. The survey has been conducted every two years since 2003.>

Contents © 2009 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.>

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This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.