Executive Severance and Change-In-Control Practices

Companies maintain executive severance programs to attract executive talent and to protect executives in the case of certain terminations. Absent a change-in-control (non-CIC), severance provisions protect the executive from a not-forcause termination resulting in an unexpected loss of income and aid a company’s recruitment of in-demand executive talent.

In the case of a change-in-control (CIC), establishing executive severance arrangements becomes more nuanced. Providing severance pay to executives following a CIC enhances alignment with shareholder interests by neutralizing the potential for management opposition to a deal that is good for shareholders but could cost management their jobs. CIC-related severance is therefore more prevalent than non-CIC severance because of the underlying shareholder alignment imperative.

Severance practices for executives have changed significantly in recent years, both in CIC and non-CIC situations. As a result of this changing landscape, the past few years have seen notable severance practice reform. This study examines severance and CIC practices for Chief Executive Officers and Chief Financial Officers at 200 large- and mid-cap public companies across multiple industries.