Why Golden Parachutes Are Fool’s Gold

Sam Armacost leaves BankAmerica after an unsuccessful effort to turn the bank away from trouble. His reward: a severance package worth three times his annual salary, or about $1.7 million.

Bendix, having traumatized many other corporate managements with its own takeover thrusts, gave $18 million to 22 top executives of its own when it sold out to Allied several years ago.

The list of such deals is endless. They’re called “golden parachutes,” and more and more of the nation’s biggest companies now endow their key people with them, assuring them of a handsome consolation prize should their company slip out of their control. Some executives, such as Armacost, get them for being forced out even without a takeover.

The rationale for all this largess is rather curious, yet accepted almost without question by corporate boards.

What these big pay packages are supposed to do is eliminate any potential conflict of interest when the leaders of a company are faced with buyout offers. According to this reasoning, the top people would be so fearful of losing their own jobs and salaries in such a deal that they would not negotiate in good faith.

The position is a ridiculous one on several counts.

In the first place, it turns the conflict-of-interest question on its head. Give the top man several million dollars if he sells the place out (Bendix Chief Executive Bill Agee got $4.3 million) and there are going to be a good many bosses who would just as soon sell, hit the beach for a while and then start anew, richer and fresher, somewhere else.

That raises the second point: Why should several people at the top be given any kind of incentive to sell the rest of the management and the work force down the river? It isn’t only the people at the top who suffer in a takeover. History shows that the shake-ups usually extend on down the line, even to the factory floor.

Extend the Benefits

The answer might well be to extend the benefits of the parachute to everybody in the place. Forbes magazine reports on a company that has done just that. Herman Miller Inc., a Michigan company making office furniture, calls them silver parachutes. All employees with at least two years of service will get at least a year’s pay if they lose their jobs as a result of a takeover.

A third important point is that giving such benefits to the top officers of a company suggests that somehow these few people have the capacity to scuttle important deals without being called to account for it. It is revealing evidence of an attitude that the chief executive has God-like powers that even the directors, elected by the shareholders, can’t control. Indeed, that is true at many concerns because boards are hand-picked by the chief executive and made passive as a consequence.

The answer to that, of course, is that instead of letting such executives vote themselves golden parachutes, the board should be reorganized to provide some independent oversight. Then if the top person doesn’t represent the company’s best interests in negotiations, the board can send in a substitute.

Golden parachutes are a sad commentary on the way too many companies are run. Top executives get the idea that they own the place, even though in most cases they have risked little of their own money in the business, and that they are entitled, no matter what, to leave wealthy.

A far better approach to insuring proper consideration of buyout offers would be to bring more of the interests involved in the matter into the negotiations--representatives of the work force, non-management representatives of the shareholders, perhaps even individuals more likely to recognize the potential impact on the community at large.

The fact is, there is entirely too much incentive to sell out these days, with too little consideration of the toll in human careers and in economic inefficiency. With so much of the stock in American business held by big institutions competing to show short-term investment performance, takeovers are encouraged because they hype stock prices and produce quicker profits.

The golden parachute unnecessarily tips the balance even more in that direction.