Golden Parachutes Are Still Very Much in Style

June 29, 2013

Golden Parachutes Are Still Very Much in Style



MOST employees who leave a company are typically offered modest severance — in some cases a corporate pension, and perhaps a retirement party hosted by co-workers. For many chief executives of corporations, the rewards are far, far richer. Executives who choose to retire — or are forced to retire — often receive millions when they leave. And despite years of public outcry against such deals, multimillion-dollar severance packages are still common.

In 2012, the biggest package went to James J. Mulva, who stepped down as C.E.O. of ConocoPhillips after 10 years, according to an analysis by Equilar of the 10 largest exit packages. His total: about $156 million. As with all C.E.O.’s on the list, his exit sum is on top of salary, bonus and other compensation received while working for the company.

“We calculated severance pay as the total of any amounts given in connection with end of service as C.E.O.,” said Aaron Boyd, director of governance research at Equilar.

In Mr. Mulva’s case, much of the payout came from the market value of stock gains he received. But he also received payouts from a cash severance, a bonus and additional retirement distributions.

ConocoPhillips said that the pay packages were fully disclosed to shareholders and that they were “the same pension and benefits programs as described in the proxy statement as any other retiring executive.”

“The vast majority of Mulva’s compensation that he earned during his long and successful career as an executive remained in the form of company stock at his time of retirement,” Aftab Ahmed, a spokesman for ConocoPhillips, said in an e-mail.

Among Equilar’s top 10, four were former chief executives of large oil and gas companies, including Sunoco and the El Paso Corporation. “Typically you are seeing these big energy companies that tend to have these big payouts upon retirement,” Mr. Boyd said.

In some cases, retiring chief executives will continue to receive millions years after their retirement. In addition to his exit package of $46 million in 2012, Edward D. Breen, formerly the chief of the conglomerate Tyco International, received deferred shares, valued at $55.8 million, in 2013. Mr. Breen, who remains chairman, will also receive $30 million more as a lump-sum pension payment in 2016 as part of his employment agreement, Equilar said.

Brett Ludwig, a Tyco spokesman, said the company’s success “in large part results from key strategic decisions made by Mr. Breen and the Tyco board to create five new publicly held companies, each of which is a leader in its respective field,” adding that Mr. Breen’s pay “reflects the increase in value of Tyco’s shares.”

Other times, huge payouts go to executives as a result of takeovers. Douglas L. Foshee received millions after El Paso, the energy company he led, was taken over by Kinder Morgan.

Extreme exit packages for chief executives became more common during the hostile-takeover era of the 1980s, when the so-called golden parachute proliferated. Boards realized that without the promise of compensation, executives would be unwilling to negotiate deals to sell their companies if an outside takeover would force them into the unemployment line. Provisions were written into employment agreements that provided everything from lump-sum payments equivalent to several years’ worth of salary to extended health insurance benefits.

“They became larger in an era when executives were resistant to having companies sold and having new management come in and basically firing the C.E.O.,” said Mark Kennedy, an assistant professor at Imperial College Business School in London. “Nobody had any idea how big they would become.”

Professor Kennedy, a co-author of a paper about this practice with Peer C. Fiss of the University of Southern California and Gerald F. Davis of the University of Michigan, said that more than 60 percent of Fortune 500 companies had golden parachutes in place by 1990. Today, about 82 percent of the chiefs of Standard & Poor’s 500 companies are entitled to some type of cash payment if they are replaced upon a change in control, according to GMI Ratings, a corporate governance firm.

Amid public anger over ballooning compensation, such contracts often became more complex and opaque. And many companies disputed that current severance payouts or enhanced retirement packages are really “golden parachutes,” designed to offer soft landings in the event of takeovers. However they are characterized, hefty packages for departing executives are still common.

“The main reform that I would like to see is not have severance agreements that are soft landings for executives who did a poor job,” Professor Kennedy said.

EVEN those forced out of the corner office can receive giant payouts. John R. Charman, the former chairman and chief executive of Axis Capital Holdings, an insurer and reinsurer based in Bermuda, received more than $26.5 million to walk away from the company, according to Equilar.

In an interview with a newspaper in Bermuda, Mr. Charman called his ouster from Axis Capital “an act of monumental betrayal.”

Axis said last year that he had been terminated as chairman “without cause” after the board could not resolve “differences with Mr. Charman over his understanding of the role and responsibilities of the chairman position.”

Mr. Charman became chairman and chief executive of Endurance Specialty Holdings, an insurer based in Bermuda, which gave him about $35 million in restricted stock as well as 800,000 stock options when he joined last month.

A spokeswoman for Endurance said in an e-mail that Mr. Charman would not comment for this article.

Shareholders are starting to push back against packages that may seem excessive. Proxy advisory firms have been suggesting that shareholders reject those that seem too generous, but such votes are generally nonbinding.

Laws like the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 intended to try to claw back pay from executives when it was undeserved. But a 2011 study by Jesse M. Fried, a law professor at Harvard, and Nitzan Shilon, then a law student there, found that effective clawback policies were lacking at most S.& P. 500 companies.

“If you actually read what these policies say, they are not very robust,” Professor Fried said. “They all stem from the same basic problem: the directors are not paying with their own money.”

Some companies have renegotiated their goodbye packages with departing executives. Vikram S. Pandit, the former chief of Citigroup, who is not on the top 10 list, agreed to forfeit a $26.6 million “retention” package from 2011 after he was forced out in October. The bank said in its proxy that he “did not receive a severance payment or special treatment of his outstanding awards as part of his separation from Citi.”

But the board awarded him $6.7 million as a 2012 bonus, based on the performance of the company that year.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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