Wondering how golden parachutes stay aloft?…

January 18, 2012

How could what started as a good idea go so far astray? Does an executive ever deserve $100 million… or more?

In theory, golden parachutes started out with a reasonable premise: Executives should act in the best interest of a company and its shareholders. And, in some cases, that might mean leading the company into a merger or sale. Yet what’s best for the company might be the worst move for the executives, who might soon find themselves without jobs. Enter the golden parachute – the practice of paying executives enough on their way out the door so that they can make the mortgage payment during the time it takes to line up their next job.

But, as we all know from reading the headlines (including 2011’s winner of the Worst Footnote of the Year contest, former Hewlett Packard (HPQ) CEO, LâŸo Apotheker), golden parachutes have gotten bigger, and bigger, and – well – more golden.

Paul Hodgson and Greg Ruel, two of the super-smart minds at GovernanceMetrics International (also called GMI, which merged with The Corporate Library in 2010) just published an in-depth report entitled “Twenty-One U.S. CEOs with Golden Parachutes of More Than $100 Million.” The report slices and dices the “walk-away” packages of CEOs going back to 2000, and it’s a fascinating read.

Hodgson, a Senior Research Associate at GMI, said in a telephone interview that he and his colleagues have been crunching data on golden parachutes for years. Some of the information in this report appears in other reports, but this is the first document that systematically puts all the data in one place. And – for at least a couple of the former CEOs – including GE’s Jack Welch and IBM’s Louis Gerstner, this may be the first time that the full value of their golden parachutes has been tallied.

“There was so much fuss about Welch’s perks package,” Hodgson said, recalling the uproar over the perks that were disclosed when they came to light during Welch’s divorce. “And yet the value of the whole package completely dwarfs the value of the tickets that he got to the baseball and basketball games.”

Hodgson and Ruel conclude that good theory eroded into bad practice when the principles were applied too widely. In their report, they state:

“In principle, to protect someone from financial harm if they lose their job due to a merger, that executive needs a single year’s salary and bonus. A CEO should not need three or even two years— salary and bonus, plus immediate vesting of all equity and pensions, plus benefit and perquisite continuation, as was paid to most of the CEOs in this report.”

In practice, the authors found that the golden parachutes seemed to be “only in the interest of the departing executive,” and – in a few cases – the executive got the money without even leaving the company.

We asked Hodgson how he would respond to the argument that companies regularly make: They have to shell out the big bucks to attract the top-notch talent that it takes to run a company. But Hodgson doesn’t buy that argument; and, in fact, he has published a report that proves quite the opposite. Entitled “Pay for Success,” Hodgson’s report looks at the pay policies of companies “where long-term value creation and moderate compensation of the CEOs responsible are clearly linked.”

Moderate executive pay in exchange for real success in business. Now that’s a refreshing thought, indeed.

Image source: Golden Parachute via Shutterstock

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