Hewlett-Packard’s announcement that it will no longer accelerate the vesting of equity grants for departing executives is the latest victory in a new push by active investors to limit such generous exit packages (a Wall Street Journal story about the announcement is available here).
The drive began in 2010 when Amalgamated Bank’s LongView Funds filed shareholder proposals at several companies urging them to back away from the long-standing practice of accelerating awards of restricted stock or stock options when an executive departs after a change in control or even without such a change. (Pro rata vesting would be allowed under these proposals.)
The LongView Funds argued that these equity awards were intended to be performance-based, and multi-million dollar awards that disregard vesting requirements have nothing to do with performance. The value of accelerated awards can often dwarf the amount paid in terms of the “base pay plus bonus” components of a severance agreement. Eight-figure payouts are not uncommon.
Better practice is not without precedent. Occidental Petroleum responded to a 2010 Amalgamated resolution by adopting a pro-rata policy (available here), joining ExxonMobil and Chevron in the oil and gas sector, who simply forfeit unvested equity
Where companies have resisted, the resolutions received solid, though not majority support, with LongView Fund proposals averaging over 40% at the 2011 annual meetings of Anadarko Petroleum, EOG Resources, and Sunoco. The level of support is high for a new proposal and places the issue among the more popular compensation related proposals of recent years, such as shareholders’ push for say-on-pay and bans on tax gross-up provisions.
Curiously, the companies’ defense of accelerated vesting has nothing to do with performance. Instead, the principal defense is the need for flexibility in pay packages and an ability to match competitors. There is also sometimes a suggestion that departing executives are somehow entitled to reap the anticipated rewards that they will not stick around to enjoy
Of course, the latter rationale has nothing to do with performance. As for the “everyone does it” rationale, the fact is that not everyone does it. Moreover, there are a number of executive pay packages that everyone used to do, yet are no longer practiced. Finally, the original rationale for a severance package was to promote neutral analysis of any deal by easing any transition after a takeover — not to shower the departing executive with cash. It seems unlikely that a senior executive would be wanting with the “base plus bonus” share of a typical severance package plus a pro rata vesting of unvested equity awards.
Early traction on the issue is now fueling greater engagement among investors on the issue. So far in 2012, nine funds have filed similar proposals at 25 companies. If companies continue hewing to the “everyone does it” rationale for accelerated vesting, the topic could play a significant role in the upcoming proxy season.