Corporate Governance

Shearman & Sterling LLP 89 | Golden Parachute Provisions "Better-Of" Provisions Under a "better-of" provision, employees will receive change in control payments equal to the greater of (1) the after-tax amount they would have received after the imposition of the Section 4999 excise tax and (2) the "cut-back" amount (i.e., the safe harbor). Change in Control Excise Tax Provisions "Cut-Back" Provisions Under a "cut-back" provision, the change in control payments are automatically reduced to the safe harbor amount (or in many instances, 2.99 times the base amount) so that no excise tax applies. Excise Tax Reduction Provisions Companies are increasingly adopting measures to protect executives from the excise tax without providing tax gross-ups. The two most common measures include a "cut-back" provision and a "better-of" provision. Excess Parachute Payment Code Sections 280G and 4999 are triggered if all parachute payments equal or exceed three times the executive's base amount. The amount of the excess parachute payment that is not deductible under Section 280G, and subject to the excise tax under Section 4999, is any payment in excess of one times the executive's base amount. Safe Harbor The safe harbor is three times the executive's base amount, less one dollar. Many companies use a 2.99 multiple in making their calculations to avoid an inadvertent trigger. Base Amount An executive's base amount is the average of his or her compensation from the employer that was includible in his or her gross income for the most recent five calendar years ended prior to the year in which the change in control occurs. 48 2 of the Top 100 Companies maintain a "better-of" provision of the Top 100 Companies maintain a "cut-back" provision Description of Golden Parachute Provisions Under the Code Section 4999 of the Internal Revenue Code (the "Code") imposes a 20% excise tax on the amount of any "excess parachute payments" received by certain executives, and Section 280G of the Code disallows an employer deduction for those payments. Any gross-up payment made in connection with the excise tax will also be subject to the excise tax and will be non- deductible. If the aggregate present value of all parachute payments paid to an executive (including cash and accelerated equity awards) equals or exceeds three times the executive's base amount, then the executive will be considered to have received an excess parachute payment. With the advent of say-on-pay and increased focus by institutional investors on executive compensation, golden parachute gross-up provisions have become all but obsolete at the Top 100 Companies. Many of the Top 100 Companies are implementing reduction provisions intended to protect executives from the excise tax known as either "cutback" provisions or "better-of" provisions. Data Golden Parachute Provisions Change in Control Gross-Ups Overtime When we first began collecting data on change in control gross-ups, over 50% of annual Top 100 Companies provided for a gross-up. As the gross-up became all but nonexistent, other types of provisions, particularly "better-of" provisions, have become more in favor. Those types of provisions have grown from 10 companies to 48 companies.

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