Parachute Severance Agreement
If the total $1 bonus amount was used as the bonus amount, the total amount would be subject to the 20% excise if the amount is higher than the portion of the parachute corresponding to triple the base salary, which is the average salary of the previous five years). If our CEO has a “gross up up” rule in his severance contract, the company is now required to increase its golden parachute by a sufficient amount to offset the excise obligation. Unfortunately, he cannot simply increase his payment by $600,000, because the executive also has to pay taxes on that amount — a lot of taxes. In fact, every dollar distributed in this example of gross collection is taxed at a total tax rate of 69.85%, which consists of the following levies: 39.1% federal income tax, 1.45% Medicare tax, 9.3% public income tax and 20% federal consumption tax. As a result, the company will have to spend an additional $1,990,050 on the gross amount, which is the amount it will take before taxes to give management an additional $600,000 in net. This represents about $3.32 for every $1 received. Carefully check the language of your plans, especially the sections in which it is clear what will trigger a parachute payment. Some unique trigger plans will come into effect when the company changes control, whether the undercover manager actually loses his job or not. Double-trigger plans require that both conditions – a change of control and a loss of position – be met.
Other plans are simply triggered by shareholder approval of a merger or acquisition that can backfire if the deal is then struck down by antitrust authorities. Most compensation experts suggest avoiding this kind of language. Whatever your goal, “the last thing you want in an acquisition agreement is a plan that`s not clear,” warns Stephen Pennacchio, executive director of compensation and benefits for Texaco, Inc. “You want to check the language both internally and externally with your accountants and lawyers.” Golden parachutes like this one are hardly new to the U.S. economy. But what has changed is what can trigger such paydays. Golden parachutes are now poured even when leaders leave in the middle of a scandal. And while many now contain clawback rules, they tend to be applied inconsistently. Smisek, for example, resigned in the scandal of a federal investigation into whether United Airlines had over-influenced David Samson, president of the Port Authority of New York and New Jersey (Samson finally pleaded guilty this year to corruption charges). Ailes` payment came after a series of sexual harassment charges and a complaint filed by former Fox News anchor Gretchen Carlson (who received a $20 million deal).
Set clear conditions for what triggers parachute payment. Some agreements may only require the company to go through a change of control, which could result in an executive receiving a high payment from a merger while maintaining his or her employment. Other agreements may require that the change of control occur and that the recipient loses his position.
October 16, 2021
October 15, 2021