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There are few phrases more likely to stir investor anger than “change in control provision”. Fair compensation for those who lose their jobs in a merger is one thing. It is something else entirely to hand wads of cash to executives who hold on to their positions or leave when the new management wants them to stay.

But cracking down on the practice is not as easy as it might seem at first. When the US government tried taxing especially large benefits, it cost some investors even more as contracts started including a “gross-up” payment to cover taxes.

Now activist investors are targeting companies with golden parachute programmes, and a new survey of 182 big US companies by consultancy Mercer suggests their complaints are being heard. Nearly 60 per cent of the companies surveyed have altered their change in control programmes in the past year. While many were simply making technical adjustments, the substantive changes were largely aimed at addressing windfall payments. Nearly 20 per cent of companies making alterations added new conditions for cash severance to make sure it was triggered only by a sale plus a termination or a big reduction in responsibilities. An even larger group, nearly 25 per cent, tightened equity vesting rules or limited the way they ease the taxman’s bite. These changes should save investors money and help keep buy-out offers from becoming invitations to grab cash.

But investors should be careful what they wish for. Many corporate governance reforms are aimed at solving an existing problem but create new ones. Increased disclosure of corporate salaries was supposed to rein in excess, but led instead to a ratcheting up of pay as chief executives demanded “above average” compensation. This time, boards should be wary of stacking the deck too heavily against transactions. If executives know they will not get anything out of a sale, they may be more inclined to sit tight in their jobs and turn down deals that would have been good for investors.

Copyright The Financial Times Limited 2017. All rights reserved.
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