A financial lesson from McGraw-Hill…

December 13, 2011

Sometime around the new year, the venerable McGraw-Hill Cos. (MHP) plans to split in two, separating its seemingly stodgy textbook-publishing division from the racier financial division — which is dominated by Standard & Poor’s,* one of the credit-rating services that didn’t exactly cover itself in glory in the run-up to the financial crisis. Last week, McGraw-Hill announced it would lay off 550 people in its education units, just in time for the holidays, with mutterings about “additional realignment” to come.

So we shouldn’t be too terribly surprised that late yesterday afternoon, we found an 8-K with McGraw-Hill’s name on it, suggesting that the board and management are starting to look out for their own. Specifically, the filing laid out how the company is improving layoff benefits for the company’s top executives for 2012.

And by “improving,” we mean “doubling to almost tripling.” As laid out in McGraw-Hill’s proxy, filed in late April, and in the 2008 Senior Executive Severance Plan, top executives essentially got 80% of a month’s pay for every year they had been with the company, to a maximum of 15 years’ service — ie, a maximum of 12 months’ continued salary, with minimum of six months (or a minimum of 12 months if terminated after a change-of-control). Then they’d get essentially the same amount again at the end of that period (in many cases in a lump sum), plus health, dental and other insurance benefits the whole time.

That’s nice enough. But the 8-K this week appears to sweeten it considerably, if a little vaguely. Now, any executive served a pink slip during 2012 (on 60 days’ notice) will receive

“severance generally calculated under the Senior Executive Plan’s current service-based formula, except that the minimum severance under the Senior Executive Plan is increased to 24 months of base salary for individuals with 15 or fewer years of service and up to a maximum of 32 months of base salary for individuals with 20 or more years of service”

The original 2008 document doesn’t define the term “severance,” and calls the payout we described above “separation pay” and “supplemental separation pay.” So it’s a little hard to tell whether the new filing applies just to the initial payment (which is more like salary continuation) or the second (which is more like severance), or both. But it sure reads like it resets the minimum payment to 24 months of salary, from six months, for shorter-tenured executives — and to 32 months minimum for longer-tenured executives. (Keep in mind the old plan capped each payout at 12 months’ salary absent a change in control.)

Unfortunately, McGraw-Hill doesn’t do much to clear up the mystery by neglecting to file the actual amendment, which they technically can put off until the 10-K next spring. Harold “Terry” McGraw III seems to be setting himself up to run the new financial company — which, to hear Reuters tell it, is as usual getting rather more attention than the education section — so we doubt he’s likely to need severance benefits. But just as a yardstick, he’s credited with 31 years of service at the company, meaning his potential severance would seem to jump to at least $3.7 million (32 months x $1.39 million-a-year salary), up from a maximum of $1.39 million. (And then there’s the potential for that “supplemental separation pay” to essentially double it.)

Now, I worked for BusinessWeek magazine during the last 15 months it was owned by McGraw-Hill, from August 2008 until its sale to Bloomberg LP in December 2009. Being part of a ponderous giant had its pluses and minuses — including good benefits on the one hand, and a hidebound technical capability on the other.

But one thing stood out to me at the time: For eons, the company had a reputation for taking care of its employees, and while the reputation was already tarnishing somewhat, my longer-service co-workers gave much of the credit for what remained to the legacy concerns of Terry McGraw (great-grandson of the man whose name still graces the company). A little of that could be seen when BusinessWeek was sold, and McGraw-Hill’s negotiators made sure that longtime BusinessWeek employees got a decent deal if they lost their jobs before the deal or in the year that followed.

A couple of years on, and now looking in from the outside, it’s hard to tell how much of that concern is still there for the ordinary employees. But at least for a few of those at the top of the heap, it’s clear old paternal instinct remains.

* We should note that we’re owned by Morningstar (MORN), which has a competing credit-analysis operation. But plenty of others — including bloggers and financial and mainstream outlets — have opined on S&P’s performance in recent years, and regulators are sniffing around; draw your own conclusions.

Image source: money background photo via Shutterstock.com

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