CEO Severance Consolidates Around Common Practices

A recent study from Meridian shows that policies on CEO severance benefits not connected to a change-in-control are consolidating around several best practices. The study reviewed disclosed severance policies at 100 S&P 500 companies:

• For all companies, an involuntary termination without cause will trigger severance. 
  • Half (51%) provide severance to the CEO under a voluntary termination with “good reason.” 
    • Only 35% provide the same for NEOs.
• More than 80% of companies do not fully vest any type of equity upon termination. 
  • Options are most commonly forfeited (53%) while 26% use prorata vesting.
  • Restricted stock are evenly split at 40% each for forfeiture or prorata vesting.
  • Performance shares are vested on a prorata basis 47% of the time or forfeited 40% of the time.
• 62% of CEOs receive a 2x cash severance multiple while another 22% receive 1x. 
  • For NEOs, 2x is the most common at 40%, but 1x is used by 38% of companies.
• 73% of companies define the CEO’s cash compensation as base salary + bonus. 
  • 59% of companies use the same definition for NEOs.
• It is most common (28%) for CEOs to receive 24 months of health benefits. 
  • NEOs are most likely (34%) to get 12 months of health benefits.

The results generally line up with the Center’s survey on Long-term Equity Treatment from May 2021. Severance benefits remain a hot-button issue and are one of the most common reasons that proxy advisors will recommend shareholders vote against a say-on-pay proposal even if pay and performance are reasonably aligned.