While most companies devote a portion of their Compensation Discussion and Analysis to describing the reasons for providing severance and change in control payments and benefits for their named executive officers, rarely do they provide much detail about how they arrived at the specific design features of these arrangements. Certainly, it’s true that the terms and conditions of these provisions are generally disclosed in the Potential Payments upon Termination or Change in Control section of the executive compensation disclosure as required by Item 402(j) of Regulation S-K. But the CD&A can be a good place to discuss the factors that were considered by the Board of Directors or Compensation Committee in selecting the specific payments and benefits to be made available pursuant to the company’s plan or agreements.
Recently, I found myself thinking of the utility of such disclosure while reading the definitive proxy statement of Fluidigm Corporation, a South San Francisco-based manufacturer of biological research equipment. In the post-employment compensation discussion in its Compensation Discussion and Analysis (located at page 48), the company spends some time describing the factors that its Board of Directors considered in determining its severance and change in control arrangements:
Each of our executive officers participates in our Change of Control and Severance Plan adopted in August 2017, which provides for specified payments and benefits if the executive officer’s employment is terminated for a reason other than for cause, death or disability, or if the executive officer’s employment is terminated by the executive officer for good reason, with the payments and benefits provided generally greater if such termination occurs in connection with a change of control. The terms of our executive officers’ participation in the Change of Control and Severance Plan are described under the section entitled “Potential Payments upon Termination or Change of Control.”
Our Board concluded that it is in the best interests of our Company and our stockholders to provide assurances of specified benefits to certain of our employees, including our executive officers, whose employment is subject to being involuntarily terminated other than for death, disability, or cause or voluntarily terminated for good reason under the circumstances described in the plan. Our Board determined to provide such executive officers with certain severance benefits upon their termination of employment without cause outside of the change of control context in order to provide executive officers with enhanced financial security and incentive to remain with our Company. In addition, we believe that providing for acceleration of equity awards if an executive officer is terminated following a change of control transaction aligns the executive officer’s interest more closely with those of other stockholders when evaluating the transaction rather than putting the executive officer at risk of losing the benefits of those equity incentives.
In determining the amount of cash payments, benefits coverage, and acceleration of vesting to be provided to executive officers upon termination, our Board considered the following factors:
- the expected time required for an executive officer to find comparable employment following a termination event;
- feedback received from potential candidates for executive officer positions at our Company as to the level of severance payments and benefits they would require in order to leave other employment and join our Company;
- in the context of a change of control, the amount of vesting acceleration that would align the executive officer’s interests more closely with the interests of stockholders when considering a potential change of control transaction; and
- the period of time following a change of control during which management positions are evaluated and subject to a heightened risk of elimination.
You have to refer to the Potential Payments upon Termination or Change of Control section of the proxy statement to fully appreciate the impact of these factors on the ultimate design of the Change of Control and Severance Plan. For example, accelerated vesting of outstanding and unvested equity awards is provided only under a “double trigger” provision involving both a change of control and a subsequent loss of employment (and not for an involuntary termination of employment outside a change of control scenario). Further, the length of the prescribed “change of control period” (which runs from three months before and ends 12 months after a change of control of the company) was clearly influenced by the Board’s view as to when incumbent executives are most at risk for losing their position following a change of control. To me, the factors listed in the CD&A offer a useful complement to the more specific information in the “Potential Payments” disclosure and help stockholders better understand the Board’s thinking with respect to the specific design features reflected in the company’s severance and change of control arrangements.
-Mark Borges, CompensationStandards.com May 27, 2020