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Paid Time Off and PTO Banks:

A Research Reportby WorldatWork and

Innovative Compensation andBenefits Concepts LLC (ICBC)

May 2009

Severance and Change-in-Control

Practices

©2009 WorldatWork Any laws, regulations or other legal requirements noted in this publication are, to the best of the publisher’s knowledge, accurate and current as of this report’s publishing date. WorldatWork is providing this information with the understanding that WorldatWork is not engaged, directly or by implication, in rendering legal, accounting or other related professional services. You are urged to consult with an attorney, accountant or other qualified professional concerning your own specific situation and any questions that you may have related to that.

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About Innovative Compensation and Benefits Concepts, LLC

Innovative Compensation and Benefits Concepts, LLC ([email protected]) is

a consulting firm that specializes in providing thought leadership to companies

in the Public, Private and Not-for-Profit sectors, and representing Compensation

Committees as an experienced and knowledgeable advisor, developing Total

Reward retention strategies, achieving better alignment of Human Resource

programs with an organization’s business strategy, designing more effective and

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WorldatWorkSeverance Survey 2009

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Severance and Change-in-Control Practices May 2009 Introduction and Methodology This report summarizes the results of an April 2009 WorldatWork member survey, conducted jointly by WorldatWork and Innovative Compensation and Benefits Concepts LLC (ICBC), a global HR consulting firm. This survey was conducted to analyze and enhance our understanding of variances in the severance and change-in-control (CIC) practices across organizations and industries. A random, representative sample of 4,986 WorldatWork members was asked about general severance plans, CIC policies and severance for top executives via an e-mail invitation on March 23, 2009, which contained a link to the online survey. When the survey closed, 750 responses were received (a 15-percent response rate). This survey has been conducted every two years since 2003 and, despite a few minor variations, the questions have remained consistent throughout the four surveys. This report focuses on 2009 survey results and shows comparisons to 2007, 2005 and 2003 findings where possible and appropriate. The demographics of the survey sample and the respondents are similar to the WorldatWork membership as a whole. Therefore, the survey results can be considered statistically representative of the membership. The typical WorldatWork member works at the managerial level or higher in the headquarters of a large company in North America. “Margin of error” is a common summary of sampling error that quantifies uncertainty about a survey result. A survey’s margin of error is affected by type of sampling, sample size and the size of the total population. Because this survey employed a random sampling method — the total number of respondents (750) and the total population is the WorldatWork membership of approximately 23,600 — the survey’s margin of error should not exceed +/- 3%. Individual questions with a lower response rate will have a higher margin of error.


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Table of Figures Severance Plans Figure 1: Reductions in Force/Layoffs in the Past 12 Months Figure 2: Anticipated Reductions in Force/Layoffs in the Next 12 Months Figure 3: Coverage of Plans Figure 4: Documentation Severance Plans Covering Largest Number of Employees (Excluding Top Executive-Only Plans) Figure 5: Basis for Calculation of Benefits Figure 5a: Definition of Cash Compensation for Severance Figure 5b: Definition of Bonus for Severance Figure 6: Formula for Determining Cash Compensation for Severance Figure 7: Years of Service Maximum for Tiered Plan Figure 8: Minimum Amount of Cash Compensation Figure 9: Maximum Amount of Cash Compensation Figure 10: Prevalence of Outplacement Benefits Figure 10a: Duration of Outplacement Benefits Figure 10b: Composition of Outplacement Benefits Figure 11: Prevalence of COBRA Subsidy Figure 11a: Period of COBRA Subsidy Figure 11b: Duration of non-COBRA Medical Coverage Assistance Figure 12: Severance Plan Review Figure 13: Change in Severance Amounts Provided Today vs. Two Years Ago Plans for Top Executives Figure 14: Definition of Cash Compensation for Severance Figure 14a: Definition of Bonus for Severance Figure 14b: Calculation of Bonus for Severance Figure 15: Months of Cash Compensation Figure 16: Payout Method Figure 17: Continuation of Benefits Change-in-Control Plans Figure 18: Severance Eligibility Figure 19: Change-in-Control Plan Review Figure 20: Eligibility for Accelerated Vesting of Stock Options/Equity Awards Figure 21: Accelerated Vesting or Payout for SERPs Figure 22: Gross Up of Golden Parachute Excise Tax Figure 22a: Positions Eligible for Gross Up Figure 23: Good Reason for Constructive Termination Figure 23a: Good Reason Requirements


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Summary of Findings The current economic environment is dramatically different than those of any of the past three survey years (2003, 2005 and 2007), and this is clearly reflected in this year’s survey results. With companies trying to survive what several experts have called the deepest recession since the Great Depression, many have identified their most immediate cost-cutting weapon to be the reduction in force (RIF) or layoff. Several years of stock market gains have been erased in a matter of weeks, for some companies resulting in stock market levels not seen since 1998. Since the RIF/layoff is such a prevalent tool in this recession, knowing how to design an effective and responsible severance and CIC program has never been more important than it is today. Layoffs The survey reveals that nearly 25% more companies than in the previous survey experienced RIFs/layoffs during the past 12 months. Even more compelling is the fact that nearly 44% more companies are anticipating RIFs/layoffs over the next 12 months as compared to 2007, and even more respondents are uncertain whether they will need to implement RIFs/layoffs than in previous survey years. This is the case even though several surveys have reported that RIFs/layoffs are waning. Severance Plan Review Frequency There is also a significant increase in the number of organizations that have reviewed their plans within the past 24 months (76% in 2009 vs. 60% in 2007). The percentage of those who have never reviewed their plans has decreased to 11% in 2009 from 13% in 2007. Severance Plan Structure The survey revealed that fewer companies than in prior years (32% in 2009 vs. 42% in 2007) offer a three-tiered structure for severance, which includes the top executive, the next level of senior executives and then all other employees. Years of service continues to be the most common criterion for severance, while one week/year of service continues to be the most common multiplier. The most common minimum amount of cash severance is two weeks per year of service (43%), and one month (16%), respectively. The most common maximum amount of severance is still 26 weeks (23%) and 52 weeks (20%). However, nearly one in five companies (18%) provides no maximums — down from 23% in 2007.


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Outplacement Benefits Slightly more companies (77% in 2009 vs. 73% in 2007) are providing outplacement benefits to their employees with more offering benefits to all affected employees and fewer doing so on a case-by-case basis. Even with the greater prevalence of outplacement, the duration of the outplacement benefit provided is not appreciably different from prior years. Nearly three out of five companies provide three months of outplacement, vary it by grade level/position or determine it on a case-by-case basis. The type of outplacement benefit has not changed much since the prior survey with more than 4 out of 5 respondents providing some level of individual counseling: individual counseling (22%), individual and group counseling (36%) or individual counseling plus general office and secretarial services (18%). COBRA Subsidy Interestingly, and in light of the new U.S. COBRA subsidy benefit, a similar number of companies provide a partial or full subsidy for a limited period of time or to certain service levels (44%) compared to the number of organizations merely considering this benefit (45%). Of those respondents who provide a COBRA subsidy, nearly 3 out of 5 employers (58%) provide either three months or six months of COBRA subsidy (19% total), or match the period of severance with their COBRA subsidy (39%). Stock Options The number of respondents who either accelerate their stock options or extend the exercise period (24%) for those who are involuntarily terminated nearly doubled from the prior survey (13%). Gross-Up Plans Consistent with the recent wave of shareholder concern about excessive pay and perquisites, and the disfavor by regulatory groups about gross-up plans, the number of gross-up plans is declining. Eighty-five percent of respondents said they do not gross up their executives for the taxes on various benefits while another 4% said they also do not, but may consider implementing a gross-up plan in the future. Of those who do have gross-up provisions, 83% percent include the CEO, 57% the CFO, 43% the COO and 30% include any Named Executive Officer (NEO). Change-in-Control Plans In regard to CIC plans, 44% of organizations have reviewed their CIC policies within the past 12 months, which is by far the highest number since our first survey in 2003 when only 27% of companies conducted a review. (Of those companies who conducted a review nearly 3 out of 4 respondents (72%) report that their severance program did not change in the past two years with the balance split almost equally with 15% reporting more generous benefits


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and 13% reporting less generous benefits. In turn, there was a continued decline in the percentage of respondents who have never reviewed their CIC plans with only 19% reporting never having reviewed their plans in 2009, down from 23% in 2007 and 35% in 2005. A new category within CIC shows that 39% of respondents have a good reason definition for constructive termination. The most prevalent definition is a material change in duties or responsibilities (85%), a material change in compensation (71%) or a material change in benefits (34%). CIC and Bonus Multiples The CIC “multiple” for CEOs also increased in the three main categories:

12 months benefit (24%) 24 months benefit (18%) 36 months benefit (9%).

Of those respondents who include the bonus in their multiples, 53% of organizations calculated the top executive’s multiple using the target bonus compared to 15% using actual bonus. Benefits Continuation in CIC Plans Finally, offering benefits continuation in CIC plans showed a significant increase in the 2009 survey with 82% stating they offer one or more benefits (retirement, health, dental, etc.) for a continued period of time in the event of an involuntary termination, non-CIC severance, not-for-cause situation for top executives compared to only 57% for 2007.


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Detailed Survey Results

General Severance and Change-in-Control Plan Information Figure 1: Has your organization experienced RIFs/layoffs during the past 12 months? (n=744)

Figure 2: Is your organization anticipating any RIFs/layoffs in the next 12 months? (n=744)

76%63% 58%

72%

24%37% 42%

28%

0%10%20%30%40%50%60%70%80%90%

100%

2003 2005 2007 2009

no

yes

28% 32%46%

47% 43%24%

26% 25% 30%

0%10%20%30%40%50%60%70%80%90%

100%

2005 2007 2009

Don't know

No

Yes


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Figure 3: Which of the following best describes the coverage of your organization's severance plan(s) for severance resulting from not-for-cause, involuntary termination resulting from any corporate event (other than a merger or acquisition or divestiture)?

2003 2005 2007 2009 (n=696) (n=605) (n=522) (n=702) No severance plan 18% 19% 14% 15% CEO plan only 0% 1% 1% 1% One plan for CEO, one for all other employees 13% 8% 8% 8% One plan for CEO, one for key executives/officers, one for all other employees 36% 35% 42% 32%

One plan for CEO, one for key executives/officers, no other employees covered 1% 2% 3% 2%

Other 31% 35% 33% 42%

NOTE: Of the "other" responses, approximately 27% said they have one plan for everyone. Several more said they have one plan for everyone based on length of service, level, etc.

Figure 4: Which of the following phrases most accurately describes the documentation for your organization’s severance plan?

2003

(n=583) 2005

(n=601) 2007 2009

(n=616) (n=459) Detailed plans and policies in writing 52% 45% 37% 35% General plans and policies in writing 34% 23% 24% 26% Unwritten or undocumented plans and policies 14% 12% 12% 12% Employment agreements for top executives only n/a 2% 6% 5% Employment agreements and general plans and policies in writing n/a 14% 15% 17%

Other n/a 3% 6% 5%


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Severance Plans Covering Largest Number of Employees (Excluding Top Executive-Only Plans) Figure 5: What is the basis for calculation of the severance benefit? (Check all that apply.) (n=1,069)

Figure 5a: How does your organization define cash compensation for severance purposes? (n=606)

11%

12%

7%

20%

29%

95%

0% 20% 40% 60% 80% 100%

Other

Employment agreement

Title

Pay

Position

Years of service

Salary only87%

Salary and

bonus13%


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Figure 5b: If included, how is bonus defined? (n=103)

NOTE: Most respondents who indicated “other” revealed that the bonus is prorated based on the current year. Other common responses were “a percentage of last year’s actual bonus,” and “average bonus of last two years.” Figure 6: What is your current formula for determining the amount of cash compensation for severance purposes? 2003 2005 2007 2009 (n=559) (n=473) (n=447) (n=609)One week/year of service 37% 32% 31% 31% Two weeks/year of service 22% 23% 20% 18% One month/year of service 2% 1% 3% 2% More than one month per year of service n/a n/a n/a 1% Number of weeks per year of service up to a tier, then flat amount thereafter n/a n/a n/a 9%

No formula 5% 5% 7% 4% Other 34% 39% 40% 35%

Figure 7: If you provide a tiered severance pay plan, (i.e. different levels for different employees) is there a level based on years of service at which you provide a maximum amount? 2009 (n=316)5 years 2% 10 years 7% 15 years 4% 20 years 8% 25 years 9% >25 years 7% Other number of years 27%

23%

43%

1%4%

1%

28%

0%

10%

20%

30%

40%

50%

Last year's actual bonus

Target bonus Higher of target or previous

year's actual bonus

Average bonus in the past 3-5

years

Highest bonus in the past 3-5

years

Other


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More than one tier for different service levels by employees 13% None of the above 23% NOTE: More than a fourth of those who selected "none of the above" indicated “no maximum” in their text response.

Figure 8: What is the minimum amount of cash compensation that an employee might receive in a severance situation? 2003 2005 2007 2009 (n=566) (n=482) (n=448) (n=604) Two weeks' salary 46% 44% 42% 43% Three weeks' salary 4% 3% 3% 3% One month’s salary 21% 19% 17% 16% Six weeks' salary 3% 3% 3% 5% Three months' salary n/a 9% 5% 5% No minimum 2% 11% 14% 10% Other 24% 11% 15% 18% NOTE: About one-fifth of the respondents who said "other" specified eight weeks (or two months) in the open-ended response. More than a quarter of the respondents who said “other” specified four weeks.

Figure 9: What is the maximum amount of cash compensation that an employee might receive in a severance situation? 2003 2005 2007 2009 (n=558) (n=481) (n=447) (n=578) 13 weeks' salary 3% 5% 5% 4% 26 weeks' salary 28% 23% 25% 23% 39 weeks' salary n/a 1% 2% 2% 52 weeks' salary 24% 22% 20% 20% 78 weeks' salary n/a n/a n/a 1% 104 weeks' salary n/a n/a n/a 2% Greater than 52 weeks' salary n/a 5% 3% 0% No maximum 17% 22% 23% 18% Other 28% 22% 21% 30%

Figure 10: Does your organization provide outplacement benefits (benefits provided to help employees find another job) to those affected by an RIF/layoff? 2003 2005 2007 2009 (n=563) (n=485) (n=455) (n=601) Yes, to all affected 43% 43% 42% 50% Yes, on a case-by-case basis 32% 35% 31% 27% No 25% 22% 28% 23%


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Figure 10a: If yes, (you provide outplacement benefits) what is the duration of the benefit?

2003 2005 2007 2009 (n=518) (n=381) (n=335) (n=434) Three months 22% 14% 25% 22% Six months 6% 6% 7% 7% 12 months 1% 2% 2% 2% Longer than 12 months n/a n/a n/a 1% Decided on a case-by-case basis 43% 39% 34% 25%

Capped at fixed amount n/a 9% 8% 7% Same as cash severance period n/a n/a n/a 2%

Other 28% 30% 25% 34% NOTE: More than a third of those who selected "other" indicated that it varies by grade/level/position in the open-ended response.

Figure 10b: If you provide outplacement benefits, how are they composed?

2009

(n=434) Individual counseling only 22% Group counseling only 2% Individual and group counseling 36% General office and secretarial services for a fixed period 2% General office and secretarial services plus individual counseling for a fixed period 18%

Other 18% None of the above 2%

Figure 11: Does your organization subsidize any portion of COBRA coverage? 2003 2005 2007 2009 (n=565) (n=482) (n=451) (n=590) Yes, partial subsidy for a limited period of time 21% 15% 16% 16%

Yes, full subsidy for a limited period of time 29% 25% 25% 25%

Yes, but only people with certain levels of service 0% 3% 4% 3%

No 50% 57% 55% 45% Other n/a n/a n/a 11% NOTE: "No" options grouped together in 2009 to match previous years. In 2009, 43% said "No, only offer COBRA coverage" and 2% said "No, but considering."


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Figure 11a: If yes, what is the period of COBRA subsidy/coverage assistance?

2005

(n=245) 2007

(n=294) 2009

(n=304) Same as cash severance period 30% n/a 39% Six months 12% 16% 11% One year 3% 5% 3% 18 months n/a n/a 6% Two years n/a n/a 0% Three years n/a n/a 0% Through retirement n/a 0% 0% Through Social Security minimum age (62) n/a n/a 0% Through Social Security maximum age (65, 66 or 67) n/a n/a 0% Other fixed number of years 0% 1% 1% Other 55% 78% 40% NOTE: Respondents who selected “other” most often indicated that the assistance period varies or lasts one month, three months or nine months.

Figure 11b: If the organization provides continued medical coverage (non-COBRA) for employees who are involuntarily severed, what is the duration of the assistance? 2009 (n=189) Same as cash severance period 64% Six months 6% One year 3% 18 months 5% Two years 0% Through retirement 1% Other fixed 1% Other 20% NOTE: More than a quarter of respondents who selected "other" indicated "end of the month" in the text entry.


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Figure 12: When was the last time your organization conducted a formal review of the severance plan/policy? 2003 2005 2007 2009 (n=559) (n=474) (n=443) (n=546) Within the past 12 months 44% 37% 39% 62% More than 12 but less than 24 months ago 23% 22% 21% 14% More than 24 months ago 18% 29% 27% 13% Never have 15% 12% 13% 11%

NOTE: 2009 data grouped to match previous years. In 2009, 5% said "not since it was established, but considering," and 6%said "not since it was established."

Figure 13: Which of the following best describes the average amount of severance provided to an employee of your organization today vs. two years ago? (n=567)

Severance Plans for the Top Executive Figure 14: With regard to severance for your top executive only, how is cash compensation defined? (n=422)

More generous

today vs. two years ago

15%

About the same72%

Less generous today vs. two

years ago13%

Salary only46%

Salary and bonus54%


14

Figure 14a: If your top executive's severance plan includes bonus, how is it defined? (n=232)

Figure 14b: How would the top executive's bonus be calculated? 2009 (n=239) One time previous year’s actual bonus 23% Two times previous year’s actual bonus 5% Three times previous year’s actual bonus 3% Higher of target or previous year's actual bonus 7% One time previous year's target bonus as multiplier 13% Two times previous year's target bonus as multiplier 3% Three times previous year's target bonus as multiplier 2% Other 44%

Figure 15: How many months of cash compensation would your top executive receive? 2003 2005 2007 2009 (n=250) (n=207) (n=333) (n=359) None n/a n/a n/a 3% Less than six months n/a n/a n/a 6% Six months 8% 11% 6% 12% 12 months 25% 11% 21% 24% 18 months 4% 29% 4% 4% 24 months 15% 25% 15% 18% 36 months 12% 7% 8% 9% More than 36 months n/a n/a n/a 1% Other 36% 17% 47% 23%

14%

3%

3%

12%

15%

53%

0% 10% 20% 30% 40% 50% 60%

Other

Higher of target or previous year's actual

Highest bonus in the past 3-5 years

Average bonus over the past 3-5 years

Last year's actual bonus

Target bonus


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Figure 16: How would severance for the top executive be paid out?

2009

(n=358) Lump sum 47% Half upon termination, half upon meeting terms of severance agreement 5%

Two annual installments 1% Annual installments 0% Monthly installments 17% Other 30% NOTE: Almost two-thirds of the respondents who selected "other" indicated “bi-weekly or semi-monthly installments” or “with the regular pay period.”

Figure 17: Which of the following benefits for the top executive would be continued for any period of time?

2009

(n=393)Health coverage 11% Dental coverage 7% Retirement plan coverage 1% Outplacement benefits 13% All of the above 15% Some combination of the above 35% None of the above 18% NOTE: More than a fourth of those who selected “some combination of the above” said "health, dental and outplacement" and 17% said "health and dental."

Change in Control Plans Figure 18: In a CIC situation in your organization, who is eligible for severance? (Check all that apply.) 2003 2005 2007 2009 (n=499) (n=415) (n=445) (n=452) All employees 37% 39% 31% 36% Only those above a certain job title 7% 15% 8% 13% Only those above a certain level of functional responsibility 7% 13% 6% 13%

Only those above a certain number of years of service 17% 6% 1% 2% Employment agreement 16% 20% 18% 24% Other 9% 8% 25% 20%


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Figure 19: When was the last time your organization conducted a formal review of your CIC policy? (n=363)

Figure 20: If your organization issues stock options and/or other equity awards, what is your eligibility policy for accelerated vesting upon a CIC?

19%

3%

5%

11%

19%

44%

0% 10% 20% 30% 40% 50%

Not since established

Not since established, but considering

More than 5 years ago

More than 24 months ago

More than 12 but less than 24 months ago

Within the past 12 months

52%

42%38%

28%

41% 43%

3% 2% 1%

17% 15%18%

0%

10%

20%

30%

40%

50%

60%

2009 (n=194)

2007(n=355)

2005(n=185)

Double trigger

Single trigger

Modified double trigger as follows

Other


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Figure 21: If your organization provides Supplemental Executive Retirement Programs (SERPs), do you either accelerate the vesting or accelerate the payout in a CIC situation? (n=116)

Figure 22: In the past six months have you grossed up any executives such as the president, CEO, CFO, COO, CTO, NEO) for the Golden Parachute Excise Tax (IRC Section 280G) if it occurs?

2009 (n=396)

Yes, full gross up 6% Yes, partial gross up 2% No, cut back compensation to level that excise tax does not apply 3% No, but considering either full or partial gross ups 4% No, and not considering 85%

Figure 22a: If yes, which executive positions have you grossed up? (Check all that apply.) (n=79)

9%

16%

16%

25%

34%

0% 10% 20% 30% 40%

Other

Accelerate vesting not payout

Do not accelerate vesting; do accelerate payout

Accelerate vesting and payout

Do not accelerate vesting or payout

83%

57%

43%

10%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

President/ CEO

CFO COO CTO NEO


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Figure 23: Do you have a definition of good reason for constructive termination that applies if employees lose their jobs within a given time period following a CIC? (n=381)

Figure 23a: If yes, what does it require? (Check all that apply.)

2009 (n=151) Material change in compensation 71% Material change in benefits 34% Material change in duties or responsibilities 85% Material change in distance to employer location (greater than a certain number of miles from the previous location) 67%

Other 13% None of the above 7%

Yes39%

No61%


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Demographics

Industry

Finance and insurance 16.6% Professional, scientific and technical services 11.9% Health care and social assistance 9.4% Utilities 7.3% Manufacturing 6.6% Information 4.6% Public administration 4.3% Retail trade 4.1% Other services (except public administration) 3.6% Educational services 3.0% Wholesale trade 1.8% Construction 1.6% Real estate and rental and leasing 1.6% Arts, entertainment and recreation 1.2% Accommodations and food services 1.1% Agriculture, forestry, fishing and hunting 0.7% Management of companies and enterprises 0.7% Administrative and support, and waste management and remediation services 0.5%

Mining 0.4% Transportation and warehousing 0.4% Other 18.5%

Organization Size

Less than 100 8% 100-499 15% 500-999 9% 1,000-2,499 15% 2,500-4,999 14% 5,000-9,999 11% 10,000-19,999 9% 20,000 or more 18%

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