ADP’s pineapple upside-down agreement…

November 16, 2011

Tucking into the 8-K that Automatic Data Processing, Inc. (ADP) filed yesterday was a little like digging into a nice, tasty slice of pineapple upside- down cake. Why, you ask? Well – as with the cake – it turns out that some of the most interesting ingredients in the attachment to the regulatory filing were baked further down in the document, most notably, on page 6.

The attachment in question (Exhibit 10.1) is a November 14 Separation Agreement that ADP gave to longtime president, CEO, and Director, Gary C. Butler, who retired on November 8 after a 37-year career with the company.

We had to read all the way down to 2.(q) to find out that ADP will pay Butler $1.55 million in January, 2012, as well as another $150,000 within 30 days of the agreement to compensate him for his FY 2012 bonus. (Based on our experience, it’s pretty unusual for a company not to summarize the terms in the body of the 8-K and then leave the details to the agreement)

Another goodie that Butler negotiated obligates ADP to provide the executive “with appropriate office and secretarial support until Butler’s 72nd birthday, which office will not, in any event, be located in an ADP facility.” Butler is 65 now, according to ADP’s press release, so this benefit could last for another 7 years. The company also agreed to transfer title to the leased company car that Butler has been driving. The company estimated the value of these benefits to be worth $622,200 in its September 27 proxy, which seems like some pretty swank office space.

And there are other interesting terms, as well. For example, all of Butler’s unvested stock options became vested on the day he resigned. According to the proxy, Butler’s vested and unvested stock options were worth nearly $6.9 million (that number assumes that unvested options had vested immediately and were exercised on June 30, 2011). This is a big deal, because had the accelerated vesting not occurred, Butler’s options would have vested in leisurely 20% increments over five years, starting a year after their grant date. The company also gave Butler the FY 2012 target grant amount of 65,000 shares of common stock under the Performance-Based Restricted Stock program. At yesterday’s closing price of $52.44, that could be worth more than $3.4 million.

In all, the proxy showed that if Butler had retired on June 30, 2011, he stood to collect nearly $29.86 million from his equity interests, Supplemental Retirement Plan, Deferred Compensation account, health coverage, and the perks (the office, assistant’s salary, and car). But as far as we can tell, the $1.7 million that the Separation Agreement promises to pay Butler is money in addition to the figure from the proxy. Think of them as a few extra cherries sprinkled on top of what he was already set to receive.

We know that Butler’s retirement was expected at some point, and ADP already had a succession plan in place. At the same time that Butler retired, the company promoted Chief Operating Officer Carlos A. Rodriguez to serve in the top executive post.

And we should point out that Butler’s tenure at ADP was profitable, a point that company Chairman Leslie Brun made in this Dow Jones Newswire article on November 9. Brun stated, “since he became CEO in 2006, revenues and profits have both increased significantly and the company is well positioned to continue its profitable growth.” With that being the case, perhaps shareholders won’t begrudge Butler a few extra bites on his way out the door.

Image source: kimberlykv via flickr

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