Huge Payoffs Lead Some to Poke Holes in Executives’ Golden Parachutes
In the end, it seemed as if Richard J. Ferris, chairman of Allegis Corp., couldn’t do anything right. But when the day came for his ouster from the company he had been with for 17 years, he floated quietly away, his “golden parachute” unfurled--all $3 million worth.
It wasn’t a reward for outstanding performance. In the last few months, it became clear that Ferris had big problems. From the inner sanctum of Wall Street to his own pilots’ union, there was opposition to his plan to build a travel empire of airline, hotel and car rental services. His critics didn’t even like the new name he had chosen for the company that owns United Airlines.
Ferris’ payment was far from unique. Today it is common for top executives in America’s biggest and best-known corporations to fall from grace cushioned by the type of generous severance payment that has come to be known as a golden parachute. From former Bendix Chairman William Agee, who snared one of the first highly publicized parachutes in 1983, to Jim and Tammy Faye Bakker, who requested a rich severance package when they left their PTL ministry, it seems as though no one likes to leave empty-handed.
“A lot of golden parachutes are rewards for leaving, and they are way out of line with individual worth or contributions to the company, particularly where a chief executive officer has mismanaged the company over time,” said Peter Scotese, who retired last year as chief executive of Springs Industries of Fort Mill, S.C., and who is a member of several corporate boards.
Recruiting Tool
Not so, say defenders of parachute payments. “They are very important and very justifiable,” said Gilbert Dwyer, president of Gilbert Dwyer & Co., a New York executive recruiting and counseling firm. Dwyer said that in the event of a raid on the company, the parachutes free senior executives to concentrate on negotiating the best deal for the shareholders instead of themselves.
Companies that provide parachutes for executives say they are a recruiting tool in the topsy-turvy world of mergers and acquisitions, where deals worth a total of $190.5 billion were closed last year. Management consultants say it can take six months to a year for top managers to find jobs, prompting candidates for high-level positions to look for companies that offer protection in case of a takeover or other change.
In fact, the mushrooming growth of parachutes in the last few years is a direct result of corporate merger and acquisition fever. As deals are consummated with the stroke of a pen, some of the most secure jobs at America’s best corporate addresses have been eliminated.
In response, companies in takeover battles make sure that their senior executives are assured a safe landing.
“Severance issues used to be dealt with on a gentlemanly basis,” said E. Webb Bassick, a partner with Hewitt Associates, an executive compensation firm. “But we have entered such a fierce environment of competition with unfriendly raiders that the gentlemanly ways have been tossed out.”
Perquisite of Power
Originally, parachutes were billed as weapons that companies could use to discourage pesky suitors--a threat that has proven to be virtually worthless in the multimillion-dollar corporate takeover game. “It’s like a mosquito bothering an elephant,” Dwyer said.
Instead, they have become yet another perquisite of power in the executive suite.
JWT Group Inc., the advertising agency that recently agreed to be acquired by WPP Group PLC, quickly resorted to approving “severance agreements” for 26 key employees when WPP first came calling. The agreements guarantee cash equal to triple each employees’ salary and other benefits for three years. Gillette Co., a veteran of the takeover wars, has a parachute billowy enough to triple almost all of its employees’ salaries for five years. Revlon is trying for the second time to buy Gillette.
Other large companies have followed suit. Merrill Lynch, CBS, Baxter Travenol and scores of others now routinely offer special compensation for executives who leave top offices either because of a change in management or for other internal reasons. Though the intent of employment contracts supposedly is to attract and keep executive talent, many have clauses that compensate managers when they leave. More than 40% of major companies have parachutes, according to Bassick.
Increasingly, top executives do not need battle scars from a takeover fight to qualify for a parachute. Getting thrown out by the board of directors, for instance, also can trigger a lucrative parachute.
Like Ferris, who fell out with the Allegis board, former CBS Chairman Thomas Wyman departed with a parachute--one so generous, in fact, that its value can only be estimated. Michel Vaillaud, who was chairman of Schlumberger Ltd. as the oil-service giant was being ripped apart by family feuding, was ousted with at least $5.6 million.
Others get juicy retirement packages. Indeed, one of the going-away presents went to former E. F. Hutton Chairman Robert Fomon, who headed the brokerage firm during its worst scandal. When he retired in May, Fomon got $4 million in cash, then an award of $465,000 annually in additional pension benefits and a consulting contract with Hutton that could be worth $3.5 million. His annual salary was $1.25 million.
Similarly, the housecleaning on Wall Street that has resulted from insider trading scandals also apparently has had its rewards--just or otherwise.
When General Electric Co. replaced the top management of its Kidder, Peabody Group subsidiary in spring after an internal investigation of the brokerage firm’s role in the scandal, the company said it would honor the employment contract of former Chief Executive Ralph DeNunzio.
Kidder this month agreed to pay the federal government $25.3 million to settle allegations that it made millions of dollars in illegal insider stock trading profits that were amassed during DeNunzio’s tenure, although he has not been accused of wrongdoing. GE, which owns 80% of Kidder, would not disclose the amounts involved in DeNunzio’s contract.
Whatever their names and rationales, parachutes are growing in size and number at the top echelons of business.
A study of 1,500 companies completed last year by Dwyer’s company showed that more executive employment contracts were written in 1985-86 than during any previous two-year period. They protected a larger number of top executives within firms, and their potential cost grew to an estimated average of $4 million, with the most generous being worth about $60 million.
Most of the golden parachutes, which usually provide for a healthy multiple of current salary and a variety of benefits, were installed to cushion a drop from the corporate hierarchy after a takeover, the study showed. But a third could be triggered by loss of a job for any reason.
The size of contracts and their growing number have placed them at the center of a debate over the proper pay for a chief executive officer--on and off the job.
Harvard University economist Robert Reich said he views parachutes as a form of bribery that suggests managements would not act in the interest of shareholders without a bonus. He said they hurt productivity.
“Corporate managers are in the habit of feathering their nests, often at the expense of day-to-day production workers,” Reich said. “Workers look at golden parachutes and say, ‘Why should I knock myself out for this company?’ ”
Hard Feelings Among Workers
Indeed, as companies go through the painful process of restructuring before and after takeovers, some workers harbor hard feelings over the parachutes of some of their former bosses.
The union leadership at Time Inc., for example, is unhappy with a $4-million severance package for former Chairman Ralph P. Davidson, who will retire from the board at the end of January.
Among other payments, Davidson, 59, will receive a $415,000 guaranteed salary until his retirement, a two-year consulting contract, pension benefits and $18,500 in legal fees to cover negotiating the agreement. His salary was $573,799 in 1986.
“I think it’s an expensive squeeze play at the top at a time when many people are losing their jobs at the company,” said Key Martin, the Newspaper Guild of New York unit chairman at Time Inc.
Similarly, employees at CBS who have lost jobs in cutbacks since Laurence A. Tisch took over as chief executive looked askance at Wyman’s settlement with the network’s board.
The deal Wyman cut included $808,654 in salary, a $293,859 bonus, office space and a secretary during 1987, life and medical insurance that will decrease for the duration of his life, $400,000 a year for life in an annuity that would be worth $9.2 million if the 57-year-old Wyman lives until 80, “bonus credits” of $555,756, a lump sum of $2.8 million or 10 installments worth $3.8 million, and exercise of stock option rights.
Van Gordon Sauter, president of the troubled CBS News division, left with his $250,000 annual salary guaranteed through Sept. 30, 1990, and bonus payments. Several other CBS executives have employment contracts, some with special provisions that protect them in the event of a takeover.
So-called pension parachutes also have come into vogue as a weapon against takeovers, allowing target companies to vest employes more quickly or to improve benefits so that acquiring companies cannot capture pension funds as part of their raid.
But the parachutes that really raise eyebrows are those that are stratospheric, such as the $35 million that former Revlon Chairman Michel Bergerac took with him when raider Ronald O. Perelman--who again is seeking to take over Gillette--deposed him.
Some shareholders and critics of parachutes in general also get irate over how they are installed. Although by law such packages have to be disclosed in companies’ proxy statements, many of them are nearly impossible for the average shareholder to understand readily.
Another sticking point is when parachutes are approved. Many a sudden exit of an executive who has been told to leave comes with a last-minute parachute approved by a sympathetic board. “Some of these benefits cannot be ascertained until we come to the moment of truth,” said Graef Crystal, a professor of organizational behavior at UCLA’s business school.
Who Foots the Bill?
Finally, there is the question of who pays. Though parachute supporters say the cost is too small to matter relative to a company’s assets or the prices struck in takeover deals, some experts say that paying parachutes detracts from the value of the company, hurting shareholders.
In legislation introduced in the House and Senate to curb abuses in the takeover wars, parachutes would be subject to restrictions: votes by shareholders, a ban on parachutes approved during a tender offer, a stipulation that they must be held within the perimeters of the tax laws.
But many think that the most sensible solution may be self-restraint and fair dealing with employees and shareholders--more generous severance agreements for all employees and more disclosure of parachute pacts.
