You’re Fired! Congratulations

Study finds that large-company CEOs get three years' pay when terminated; awards not going down, either. Meanwhile, survey shows employees just glad to have jobs--with or without a severance package. Plus: Lucent settles with SEC.


It seems many chief executives are better off golfing than working.

Indeed, CEOs who left their companies during 2002 and 2001 received an average golden parachute of—get this—$16.5 million.

The exit packages range from a potential high of more than $82,000,000 (if Robert Nardelli were to leave Home Depot) down to $1,426,021 (paid to Carl Yankowski when he left Palm).

But these figures actually underestimate the total cost of terminating a CEO’s employment. The calculations were based on only the cash compensation, because companies rarely, if ever, place a figure on the value or cost of either benefits granted or the early vesting of equity awards that often accompany a termination.

These are some of the findings of a two-part study of termination policy and practice of the S&P 500 by Paul Hodgson, senior research associate at The Corporate Library.

The study also found that most employment contracts make it clear that failure to do the job is not grounds for termination “for cause.” That means that unless CEOs commit crimes, they’re still entitled to the full departure package, the study noted.

“Surely some of these CEOs could have been terminated for cause, but how many have been? When was the last time a CEO was terminated for cause? How poorly do they have to perform before this happens?” asked Hodgson.

Surprisingly, despite the recent hue and cry over exorbitant executive compensation, companies don’t seem to be cutting back on go-away packages. Contracts signed at the end of the study period contain as generous provisions as those signed up to five years ago.

“With CEOs receiving an average $15 million to start (according to an earlier study), and $16.5 million to finish, they hardly need to make any money in between,” said Hodgson.

Two of the interesting parts of the study are the level and makeup of severance benefits, and the length of employment terms contained in executive-employment contracts.

The most common severance package for CEOs is three years’ salary, bonus, and benefits, with immediate vesting of all equity awards. Not surprisingly, that package is aligned with the typical three-year executive-employment contract.

In the study of 367 exit packages, 55.5 percent of the companies would pay their CEOs’ total annual compensation for three or more years following termination “without cause.” Many others, such as Clear Channel Communications and Comcast, would continue payments for even longer periods, the study indicated.

By contrast, fewer than 2 percent would continue to pay their CEOs for less than one year.

Those with one-year severance packages include CIGNA, Newell Rubbermaid, Moody’s, and Nucor. Companies paying less than a year’s severance benefits are Family Dollar Stores, Intuit, and Micron Technology.

A side study of compensation-committee membership also underscored the relationship between very generous separation agreements and the individuals who play a role in the decision-making process.

For example, one director—Roger S. Penske—sat on the compensation committees of both Home Depot and General Electric.

Even more significantly, three of the CEOs identified as having overgenerous separation arrangements sit on the compensation committee of another company that is also named in the study as having excessive termination payments.

For example, Charles Knight, whose exit package from Emerson Electric had very similar provisions to Jack Welch’s, chairs IBM’s compensation committee. Lou Gerstner’s separation package also sounds just like Jack Welch’s.

Ivan Seidenberg of Verizon serves on Honeywell’s compensation committee. Seidenberg’s parachute is cited by the study as one of the more excessive packages in the sample, while Michael Bonsignore, the former CEO of Honeywell, received severance in 2001 that was singled out for criticism.

Paul A. Allaire, formerly of Xerox, sits on Lucent’s compensation committee. While Allaire retired, receiving only his pension, according to Xerox’s proxy, Richard McGinn’s settlement from Lucent worked out to more than $11 million.

“It’s almost as if it’s a case of you scratch my back and I’ll scratch yours,” asserted Hodgson.

In addition to salary and bonus payments, severance arrangements include a wide range of benefits, including secretarial support, office space and equipment, security, corporate transportation, health and other insurance, pension enhancements, financial- and tax-planning advice, access to apartments, and country club memberships.

In a number of cases, severance also included an agreement by the company to fund a relocation. This was the case at Palm, Tyco, and Corning.

“While it is an accepted part of compensation for new CEOs to receive relocation assistance,” said Hodgson, “it is impossible to imagine a justification for companies to pay for CEOs to move back where they came from. Even harder to understand is the decision by Verizon and Home Depot to continue granting stock options, post-termination, to CEOs Ivan Seidenberg and Robert Nardelli, respectively.”

What happens if a departing executive subsequently finds another job while he is still receiving his severance? Nothing, really.

Only 2 percent of companies in the S&P 500 would reduce any part of a CEO’s severance package if he or she gained alternative employment, according to one of the studies.

In the second report’s study of 588 of the largest U.S. corporations, only 13 companies mentioned the concept of mitigating or reducing all or part of their severance payments for their CEO. On the contrary, most companies indicated that not only are officers under no obligation to seek further employment during their termination period, but, even if they do, payment of their severance benefits will not be reduced.

“Because mitigation is applied in so few cases, most terminated executives who gain employment during the so-called severance or termination period—the time that severance payments are intended to cover—are effectively being paid twice,” said the study.

Companies mitigating severance payments include McKesson, Charter One, and Unisys.

The first report (“Golden Parachutes and Cushion Landings”) lays out actions that might be taken to reduce the excesses associated with severance. These include:

  • Reduce the length of executives’ contracts.
  • Do not include incentive payments as part of severance benefits.
  • Do not forgive retention or other loans.
  • Vest retirement benefits based solely on actual service.
  • Terminate unvested stock options and other restricted equity awards.
  • Do not pay severance benefits to an executive at the same time as consultancy fees.
  • Do not pay severance benefits to an executive at the same time as retirement benefits.
  • Cease provision of office space, administrative support, corporate transportation, financial counseling, and subsidized club memberships at the termination date.

The Corporate Library was founded in 1999 by Nell Minow and Robert A.G. Monks.

Most Employees Don’t Get Severance

While CEOs receive very lucrative separation packages, many of the rank and file don’t get any severance pay. And most don’t seem to care, either.

According to a survey by TrueCareers, nearly 72 percent of workers would accept a new job without a severance package. And nearly 80 percent of respondents said they would accept new jobs with companies offering a less-than-desirable severance agreement.

Even so, 64 percent of the 433 respondents said it is at least somewhat important to address the issue of severance compensation during an interview.

When asked what a good severance agreement should provide, 57 percent indicated the package should depend on an employee’s level of experience and length of service with the company. Compare that with The Corporate Library study, which showed that some CEOs get three-year severance packages—regardless of length of service.

One third of the respondents in the TrueCareers study reported their companies do not offer severance agreements. Nearly 40 percent said their companies offer salary for a specified number of weeks as severance, while more than one-quarter reported their companies offer outplacement assistance and other forms of severance.

Interestingly, last year 92 percent of respondents had not turned down a job opportunity because of a less-than-desirable severance package, compared with 80 percent of respondents in this year’s survey. “What’s surprising is that 72 percent of individuals would take a new job with no severance agreement,” said TrueCareers president Cecelia Dwyer.

Lucent Settles with SEC

Lucent Technologies said it reached a settlement with the Securities and Exchange Commission stemming from a number of revenue-recognition issues the company disclosed in November and December 2000.

Under the agreement, the company would pay no fines or penalties and would not be required to make any financial restatements. The settlement would also conclude the SEC’s investigation of Lucent.

Without admitting or denying any wrongdoing, Lucent said it would consent to a settlement enjoining the company from future violations of the antifraud, reporting, books and records, and internal-control provisions of the federal securities laws.

At that time, Lucent discovered it had improperly booked revenue and brought the matter to the SEC’s attention. It then revised downward its sales for the fiscal fourth quarter ended September 30, 2000, by $679 million.

“We self reported certain revenue recognition issues to the SEC in November and December 2000 as soon as we discovered them and cooperated with the SEC,” said Patricia Russo, chairman and CEO of Lucent, in a statement. “We are very pleased to be able to put this issue behind us in this manner and totally focus on moving our business forward.”

The settlement is subject to final approval by the SEC.

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