Yahoo dishes up FAQ on its employee severance plans

Yahoo offered up a little clarity Tuesday on its controversial employee severance plan and how things could play out should major investor Carl Icahn win his proxy fight to unseat Yahoo's current board.

Under Yahoo's employee severance plan, as previously reported, Icahn's proxy fight would set the stage for triggering the severance plan if he wins a majority of the board seats with his dissident directors at the annual meeting on August 1.

The plan would then kick into action should the new dissident Yahoo board terminate an employee or greatly change their duties and responsibilities, prompting them to leave. The plan would remain in affect for two years after the new board would be seated. Attorneys representing Yahoo shareholders filed a brief late Monday, asking the court to hold a trial to invalidate the severance plans before the August 1 shareholders meeting.

The investors said they feared it would deter shareholders from voting for Icahn's dissident slate because of the potential costs the company could incur, if the severance plans went into action. The shareholders, in their lawsuit, also expressed concerns it would hogtie the new board if elected because they would be limited in their ability to initiate change or institute layoffs without triggering the severance plan for two years.

Yahoo, in an FAQ to employees that was filed with the Securities and Exchange Commission on Tuesday, noted its compensation consultant did not mean Yahoo's severance plan was "nuts."

Instead, the president of Compensia meant something else when he said "that's nuts" in an e-mail exchange with a co-worker, when the parties were discussing Yahoo's employee severance plans, according to Yahoo.

Here are some excerpts from the FAQ:

Did Yahoo!'s compensation consultant say that the Plan is "nuts"?

No. As indicated above, estimating the cost of the Plan requires making a number of assumptions. Timothy J. Sparks, the president of Compensia, Yahoo!'s compensation consultant firm, explained in a sworn deposition that he used the word "nuts" to describe his opinion of using the assumption that 100 percent of Yahoo!'s employees would actually receive the severance benefits under the Plan to determine cost estimates. Mr. Sparks made clear in his deposition that his remark did not relate to the design or cost of the Plan.

Mr. Icahn says this Plan costs $2.4 billion. Is that what it actually costs?

No. An estimate of the amount, if any, payable under the Plan requires making assumptions about unknown facts and variables including: (1) the number of employees who terminate employment without Cause or for Good Reason within the two years following any Change in Control, (2) each such employee's job level and base salary, (3) the number of equity awards held by each such employee on their respective severance date, the portion of those awards that are not otherwise vested on that date, and the applicable exercise price of any option awards, (4) the market price of the Company's common stock at the time such awards are ultimately exercised or paid, and (5) the length and level of reimbursement for health care benefits and outplacement services utilized by each such employee.

Mr. Icahn quotes the $2.4 billion estimate, taken out of context, from a complaint filed in litigation against the company. This number is necessarily based on a number of assumptions, including the assumption that all of Yahoo!'s employees are terminated without Cause or leave for Good Reason following a Change in Control. No one believes that such an assumption is reasonable. For the record, the same preliminary analysis referenced in the lawsuit and relied on by Mr. Icahn and using the same assumptions (including a $35 per share stock price) as those underlying the $2.4 billion figure showed that the total payout would be $845 million or $514 million, assuming that 30% or 15% of the employees, respectively, are terminated without Cause or leave for Good Reason following a Change in Control.

If a Change in Control occurs because a majority of the existing Board of Directors is not re-elected at the annual meeting, will Yahoo! be required to honor the benefits under the Plan for any layoffs that occur for two years following such Change in Control?

Yes. If (i) a Change in Control occurs and (ii) an eligible employee is terminated by the company without Cause or the employee resigns for Good Reason within two years of the date of the Change in Control, then the eligible employee will be eligible for severance benefits under the terms of the Plan.

If Microsoft and Yahoo! sign an acquisition agreement, does that constitute a Change in Control -- or does the Change in Control occur only after the transaction is consummated?

Under the Plan, the signing of an acquisition agreement will not constitute a Change in Control. A Change in Control will have occurred only when the transaction has closed.

If Yahoo! remains an independent company and no Change in Control occurs, what happens to the Plan?

The Plan stays in effect until the Yahoo! Board of Directors modifies or terminates the Plan.

Hmmm, ever wonder if Yahoo wins the proxy fight if they'll keep this plan around for two years after the election. Change in control, or not, would Yahoo employees find what's good for the goose is good for the gander?