Ensuring soft landings for departing CEOs
If Qualcomm Inc. Chairman Irwin Jacobs were to be fired from the San Diego technology company tomorrow, he still would reap $354 million from company-granted stock and stock options.
Oracle Corp. co-founder Larry Ellison also wouldn’t have to pinch pennies if he were let go -- he has rights to buy stock valued at $493 million.
But the California executive best prepared for a forced departure is Apple Inc.’s Steve Jobs, who would take with him an estimated $538 million in stock that he gained full rights to in 2006.
Skyrocketing executive pay is an old story, but recently corporate watchdogs have been homing in on the multimillion-dollar packages collected by corporate chieftains on their way out. The amounts involved can turn forced departures into fat paydays.
The issue was underscored by the recent resignations of Robert Nardelli from Home Depot Inc. and Bruce Karatz from Los Angeles-based KB Home. Both left their jobs under fire but walked away with stock and severance packages valued at $210 million and $175 million, respectively.
President Bush picked up on the issue recently, telling a Wall Street audience Jan. 31 that corporate boards should ensure that executive pay is based on performance. But lucrative severance deals, some say, often amount to pay for nonperformance -- and are no longer needed in an era when chief executives can pile up tens of millions of dollars in stock in just a few years.
“It’s a case of using both a belt and suspenders,” said Patrick McGurn, executive vice president of Institutional Shareholder Services, which advises companies and investors about governance issues. “They are getting a ‘golden hello’ on the way in, millions for their work and downside protection on the way out.”
Defenders of the status quo say the rich packages reflect a competitive market for top executive talent.
“You look at contracts of other CEOs and everyone has a severance agreement,” said Julie Sheffet, a compensation consultant with Johnson Associates in New York. “It’s the cost of doing business.”
Executive salaries are disclosed to company shareholders in annual proxy statements and are widely reported. But the full terms of employment agreements are filed with federal regulators only at irregular intervals and generally draw less attention.
Working with Corporate Library, a Maine-based research firm, The Times examined employment agreements at the 67 California companies that are part of the Standard & Poor’s 500 index of blue-chip stocks.
Together, these leaders have accumulated rights to stock and stock options valued at $3.9 billion, averaging $57 million per CEO, the review found.
This stock-based compensation is one element of what might be called an executive’s “walk-away pay,” or money that would be available in the event of a resignation, although much of the stock-based compensation can be realized at any time. The values in the study are based on data reported in 2006 corporate proxies, the most recent available, and could have increased or decreased since then.
Corporate watchdogs say CEOs whose companies have granted them large reserves of stock don’t need severance packages too. But 38 of the CEOs have agreements that would pay them a total of $276.4 million in cash in the event that they are fired or otherwise forced out, according to the study.
In addition, 57 of the CEOs have agreements that provide stock-based compensation if they are ousted. Typically, these deals provide for the immediate vesting of previously granted options -- eliminating the waiting period before they can be used to buy company shares. Normally, employees who leave their posts voluntarily lose their rights to any unvested options.
Ray R. Irani, chairman and chief executive of Occidental Petroleum Inc., is an example of the “belt and suspenders” analogy. At the time of the survey, Irani had accumulated stock options valued at $182 million. Yet if he were dismissed, he’d get cash severance of $18.1 million as well, plus $25.6 million more in Oxy stock options.
Donald de Brier, Occidental’s general counsel, said Irani had since exercised the bulk of those options so most of their value would no longer show up in his “walkaway” pay. It already has been pocketed. Irani now has $23 million in vested stock options and $15 million in unvested options.
De Brier doesn’t dispute that Irani would get at least $18 million in cash severance on departure, an amount that would take an Oxy employee making $50,000 annually 360 years to earn.
“The board strongly approves of Dr. Irani’s performance,” he said. “The board wants to keep him here and the board wants to use an employment agreement to accomplish that objective.”
Harold M. Messmer Jr., chairman and chief executive of executive search firm Robert Half International, has accumulated stock options valued at $112 million, the survey found. If he were forced out, he would stand to get a cash payment of $16 million, plus $5.7 million in stock compensation.
Top-dollar severance deals first became popular during a wave of corporate mergers and takeovers in the 1980s, compensation experts say. In part, the deals were designed to ensure that executives would not worry about their own fates in weighing takeover offers and would act in the best interests of shareholders.
But with executive salaries and stock-based compensation as generous as they are now, McGurn suggests that severance deals should be used sparingly -- for example, for an executive hired away from another company who may worry that he or she won’t last in the new job. Such provisions should also expire after a few years, he said.
“These days, we are inking severance deals for CEOs who have been with the company for 30 years,” McGurn said. “There’s no logic to that process. Where is he going to go? If the founder is let go, it’s probably because he’s done something really detrimental to the company. Why would you agree to pay more for that?”
Of the 67 California companies in the S&P; 500, 29 don’t provide cash severance for their chiefs. This list includes the companies that employ Jobs, Ellison and Jacobs, who are among the richest men in California thanks to accumulated stock and option grants.
The Corporate Library study shows the value of unexercised stock options and restricted shares granted to executives as of Dec. 31, 2005 -- essentially, the total amount of stock and options they could cash in if they were forced to leave their companies. It does not calculate the value of shares they already own outright.
Sheffet, the Johnson Associates compensation consultant, said the departure packages reflected the value of the executives who received them.
“That’s the worth of their position,” she said. “It’s just like any other commodity. You pay what the market demands.”
Others contend that this cost of doing business is a hidden toll on shareholders of these companies, including those who own shares through mutual funds and in 401(k) retirement accounts.
If CEO salaries were lower -- and if companies didn’t pay riches to failed performers who were ousted -- these shareholders would reap bigger returns on their investments, the critics say.
“This has gone well beyond the amount that’s rational,” said Dale Oesterle, a professor specializing in contract law at Ohio State University’s law school. “Executives are extracting earnings out of the corporation that would otherwise go to shareholders. And the amounts are extraordinary.”
Most of the big California companies place conditions on severance to ensure that CEOs would get the payments only if they were terminated after a takeover or without “good cause.” But good cause can be narrowly defined.
To be fired for cause, Countrywide Financial Corp. Chief Executive Angelo Mozilo would have to be convicted of a felony or removed from office by regulatory authorities. Even then, the company would have to pay his legal fees and benefits while he appealed the decision. It also would be required to reinstate him and make up his back pay if he were eventually exonerated.
If he were forced out without “good cause,” Mozilo would be entitled to $42.8 million in severance. If he lost his job in a sale of the firm or boardroom shake-up, his severance would nearly double to $81 million, according to the study. This would be in addition to accumulated stock options valued at $204 million.
A Countrywide spokesman cited the company’s extraordinary performance under Mozilo’s leadership, delivering a 340% return to shareholders over the last five years. Providing generous compensation and severance provisions is a logical way to lock in top talent, spokesman Rick Simon said in a statement.
“The largest component of potential compensation reflects superior performance and gains enjoyed by all shareholders,” Simon said. “It is incumbent upon the board to provide the company’s executives with competitive pay packages that will attract and retain the highest-caliber leaders.”
Still, even the Grim Reaper can’t come between Mozilo and his paycheck. His employment agreement stipulates that his beneficiaries would receive at least 12 months’ salary should Mozilo die during his term as CEO.
“These deals are so ridiculous that it would be funny if it were not true,” said Richard Ferlauto, director of pension and investment policy for the American Federation of State, County and Municipal Employees, which has sponsored several shareholder initiatives to rein in Mozilo’s pay.
“As it is, it’s just tragic.”
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Fireproof
With their severance deals and the stock they’ve accrued over the years, these California executives would have little to worry about if they were dismissed. To see the “walkaway” pay of more California executives, go to www.latimes.com/execpay.
*--* Accrued stock- Stock- based based Cash Walkaway comp. severance severance pay Executive Company (In mill.) (In mill.) (In mill.) (In mill.)
Steven P. Jobs Apple $537.7 $0 $0 $537.7 Lawrence J. Ellison Oracle 474.9 17.8 0 492.7 Irwin M. Jacobs Qualcomm 336.6 17.6 0 354.2 Angelo R. Mozilo Countryw 204.0 14.1 28.7 246.8 ide Financial Terry S. Semel Yahoo 214.6 21.6 0 236.1 Ray R. Irani Occident 182.1 25.6 18.1 225.8 al Petroleum Margaret C. Whitman EBay 165.1 26.3 3.1 194.5 John C. Martin Gilead 147.8 39.5 4.2 191.5 Sciences Eli Harari SanDisk 123.6 39.0 0 162.6 Jeffrey T. Mezger KB Home 107.0 20.4 19.2 146.6 Harold M. Messmer Jr. Robert 112.2 5.7 16.0 133.9 Half Intl. Lawrence F. Probst Electron 125.3 2.6 0 127.9 ic Arts Jen-Hsun Huang Nvidia 99.2 17.4 0 116.6 John H. Hammergren McKesson 100.2 0 11.4 111.6 Daniel J. Warmenhoven Network 89.0 9.0 0 97.9 Appliance
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Note: Stock-based severance refers to stock and stock options that would be paid upon termination. Accrued stock-based compensation is the value of stock and stock options that were granted, but not yet exercised, through the end of 2005. Cash severance is severance pay guaranteed by the executive’s employment contract. “Walkaway pay” is the combined value of severance and accrued stock, and represents the amount of company-paid compensation the executive would have received if he or she had been dismissed on Dec. 31, 2005. Figures were compiled by Corporate Library based on a review of 2006 federal regulatory filings.
Source: Corporate Library
