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Amid the significant increase in shareholder proposals at Russell 3000 companies over the past year, the most prevalent executive compensation-related proposal is to limit severance payments. The proposal is substantially similar in each case and typically requests that companies seek shareholder approval for any senior manager’s new or renewed pay package that provides for severance or termination payments with an estimated value exceeding 2.99 times the sum of base salary and target bonus. This shareholder proposal has appeared on proxy ballots at 17 Russell 3000 companies over the last year and received significant shareholder support: in five cases it passed, and in the other twelve, 33-49% of shareholders voted “for.”

The proposals were written to include the value of cash severance and the value of equity awards where vesting accelerates, which means many companies’ existing severance arrangements will exceed the 2.99x threshold, especially for involuntary terminations in connection with a change-in-control (CIC).

Looking ahead, companies may increasingly be compelled to adopt policies to limit executive severance benefits, but doing so could have unintended consequences that may not be in the best interests of shareholders or result in unfair outcomes for covered executives.

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