SURVEY OF CEO COMPENSATION
Terminated? Who Cares?
Severance-pay packages for CEOs appear to be coming down.
By Perri Capell
The Wall Street Journal
Monday, April 14, 2008
Shareholder fury over oversized severance-pay packages awarded
to chief executive officers is causing boards to begin to
whittle them down.
But don't weep for the CEO yet. It is a slow process, as
these packages are still sacred cows at many firms. And
even at companies that have reduced potential severance payouts,
CEOs stand to become multimillionaires if they are terminated
without cause or following a merger.
Still, pay consultants say that in boardrooms across America, directors are giving
severance policies a closer look. A 2007 review of proxy
statements by consulting firm Mercer, a subsidiary of Marsh &
McLennan Cos., shows that 60% of 182
companies, with median annual revenue of $3.3 billion, altered
change-in-control provisions because of shareholder pressure.
"Severance pay is coming down," says Ira Kay, a
New York pay consultant at Watson Wyatt Worldwide, a
consulting firm based in
Arlington, Va. Shareholder pressure on this issue
"is an irresistible force that companies are going to have to
Alvarez & Marsal Taxand, a New York-based group of tax
professionals, studied 2007 Securities and Exchange Commission
documents from the 20 largest companies in each of 10 industries
and found that 82% of CEOs and 78% of other named executive
officers are due to receive cash severance pay if they are
terminated following a change in control. Coupled with
stock awards, deferred compensation and pension payouts, the
average value of change-in-control benefits for CEOs is $38.4
million, while the average total for other named executive
officers is $13.2 million, according to the study.
In 1984, Congress slapped an extra tax on "golden parachutes,"
the payments promised to executives if their companies are taken
over. The law imposed a 20% excise tax, which is in
addition to any federal income tax owed, on awards valued at
more than three times an executive's average compensation over
the previous five years. The law also spawned a new form
of compensation: payments to cover the new tax, known as a
"gross-up." These payments have become particularly vexing
Currently, two-thirds of CEOs and 60% of other named executive
officers are entitled to have their severance pay increased to
cover the extra taxes, reports Alvarez & Marsal Taxand.
The gross-up payments themselves are subject to both income and
the excise tax, so to ensure an executive receives the promised
change-in-control benefit, companies typically have to raise the
initial gross-up to more than two times the original amount.
The American Federation of State, County and Municipal
Employees, known as AFSCME, is taking aim at gross-ups at 2008
annual meetings, introducing resolutions to ban them at five
companies. The union contends that gross-ups are
ineffective pay vehicles. "They have no performance link
at all," says Rich Ferlauto, the union's director of corporate
governance and pension investment.
Some pay consultants say they are urging boards to reduce the
size of change-in-control payouts to amounts below the federal
excise-tax threshold, so they won't need to pay gross-ups.
In other cases, partial gross-ups are recommended.
Even the original intent of severance pay -- to help bridge
terminated executives until they find new jobs -- is being
"The idea behind cash severance is that executives need the
money to bridge them until they find a new job," says Watson
Wyatt's Mr. Kay. "That's hilarious because most of the
time they don't work again, or it doesn't take them long to find
a new job."
If fired without cause, most executives walk away with
accelerated vesting of large option and other equity grants,
deferred compensation and other benefits, which may make cash
severance pay unnecessary, says Mr. Kay.
Nevertheless, at two-thirds of large companies, CEOs would
receive cash severance worth three times their current base
salary plus three times their bonus following a change in
control, according to Equilar Inc., an executive-compensation
research firm in
Redwood Shores, Calif.
Golden parachutes originally were designed to entice executives
to stay during a hostile takeover battle by assuring them of a
sizable sum of cash in the event they were fired following a
takeover. Now, investors are urging boards to eliminate
the cash payouts or add sunset provisions that cause them to
expire when executives' equity holdings have built up, says
Patrick McGurn, special counsel of RiskMetric Group Inc.'s ISS
Governance Services unit, which advises shareholders on
"The provisions were put in for good reasons, but there are all
these perverse developments," he says. "Why work hard for
10 years to earn the money when you can make a huge payout
quickly by selling the company?"
Most equity awards vest over time, but many companies allow
immediate vesting if a change in control -- a so-called single
trigger -- takes place. Since this is seen as a windfall
for executives, many boards are now requiring a second trigger,
such as a job loss, before allowing immediate vesting in equity
plans, says Diane Doubleday, global leader of executive
remuneration services for Mercer.
The Mercer study indicates that 64% of surveyed companies that
altered change-in-control provisions added double triggers and
56% put conditions on gross-ups for top executives.
Last year, directors at General Mills Inc. approved a new plan
that reduces potential severance pay for its senior executives,
including CEO and President Ken Powell.
The plan reduces cash severance to two times from three times
their annual base salary and bonus and requires a double trigger
that includes both an ownership change and the executives'
termination before long-term stock awards vest. The plan
also requires that some severance payouts be reduced if they
trigger the excise tax.
Mike Peel, General Mills' executive vice president of human
resources and business services, says Chairman Stephen W. Sanger
initiated the new plan, which covers about 130 executives.
Mr. Powell stands to receive $10 million if dismissed following
a change in control, according to the company's latest proxy.
Mr. Sanger, Mr. Powell's predecessor, is retiring in May.
Among other firms that have reduced severance packages:
Ciena Corp., a Linthicum, Md., networking company, and
UnitedHealth Group Inc., a Minnetonka, Minn., health insurer,
say they have eliminated some gross-up provisions for
executives, while XTO Energy Inc. of Fort Worth, Texas, says it
has done so for its chairman and CEO.
Companies where boards have voted to cut back the size of
severance payouts include Rimage Corp. and Gander Mountain Co.
of Minneapolis and FirstEnergy Corp. of
Akron, Ohio, according to their proxies.
Still, changes like these have yet to be embraced across the
board. One reason is that it isn't easy for directors to
renegotiate agreements governing severance pay several years
after an executive is hired, says Dan Moynihan, a principal with
Compensation Resources Inc., a Saddle River, N.J., pay
consultant. "The current changes are typically for new
people coming in the door," he says.
That isn't stopping AFSCME and other shareholder-activist groups
from pushing for change. Boards at Nabors Industries Ltd.,
Textron Inc., CVS Caremark Corp., Northrop Grumman Corp.
and Clear Channel Communications Inc. all face resolutions this
year asking them to eliminate tax gross-ups for senior
executives following a change in control that aren't provided to
management employees generally.
Eugene Isenberg, chairman and CEO of Nabors, a Houston-based
oil-drilling company, would receive $329 million in cash, stock
and other benefits following a change in control, the latest
proxy indicates. Nabors also has agreed to provide a
gross-up payment of $146 million, according to the documents.
Nabors officials didn't return calls seeking comment.
--Ms. Capell is a writer in
Idaho. She can be reached at