Golden Parachutes : Despite criticism, the lucrative severance payments have taken hold in California’s corporate hierarchy

Raymond F. O’Brien probably can’t complain too much about his pay. The chairman and chief executive of Consolidated Freightways, a Palo Alto-based transportation company, earned just under $1 million for his labors in 1986.

And if the company is taken over and O’Brien loses his high-paying job, he shouldn’t feel too bad either. The company has agreed to give O’Brien a lump-sum severance payment--otherwise known as a “golden parachute”--worth $3.72 million in the event of a change in control.

O’Brien’s golden parachute is among the largest enjoyed by California executives, but it is far from unique. Although they have been harshly criticized by many shareholders and employee groups as elitist and needlessly lucrative, golden parachutes for top executives can be found at about four of every 10 major California companies, according to a survey conducted for The Times by the compensation and employee-benefits consulting firm of William M. Mercer-Meidinger-Hansen.

Mercer-Meidinger-Hansen’s review of the proxy statements of 239 public companies statewide found that in some industries, such as entertainment and financial services, more than half of the companies surveyed provided golden parachutes.

“The proliferation of golden parachutes is the direct result of the merger mania of recent years,” said Michael O. McCullough, a Mercer-Meidinger-Hansen associate and director of the survey. Golden parachutes, he said, were virtually non-existent four years ago. Despite continuing criticism of the severance payments, they continue to grow and have become so commonplace that many executives expect them as a condition of employment, McCullough said.

Executives with parachutes constitute a who’s who of California’s corporate elite. Turnaround artist Sanford C. Sigoloff of Wickes Cos. has one, as does movie mogul Alan Ladd Jr. of MGM/UA Communications Co. Other parachute-clad local executives include National Medical Enterprises Chairman Richard K. Eamer, Fluor Corp. Chairman David S. Tappan Jr., Lockheed Chairman Lawrence O. Kitchen, Caesars World Chairman Henry Gluck, Glenfed Chairman Raymond D. Edwards and H. F. Ahmanson & Co. Chairman Richard H. Deihl.

The Gap Inc. President Millard S. Drexler, California’s highest-paid executive last year with total compensation of $7.7 million, also has a parachute. Half of the state’s 10 highest-paid executives, as ranked in The Times’ 1986 survey of California executive pay, are covered by the controversial plans.

Golden parachutes--legally defined as severance packages for executives that take effect under a change in control--vary widely between companies, the Mercer-Meidinger-Hansen survey shows. Many plans offer a lump-sum payment equal to a multiple of the executive’s current salary. But some offer only one year of base pay while others offer as much as five times base, even though some of the higher amounts may be considered excessive by the Internal Revenue Service and may subject the recipient to a penalty tax, Mercer-Meidinger-Hansen’s McCullough said.

Many parachutes also offer other benefits, such as accelerated vesting in pension plans and stock options.

Some executives get parachutes even if they don’t lose their jobs under a change in control. Some get them even if a suitor acquires as little as 10% of the company’s voting stock. Parachutes at Walt Disney Co. and Pacific Scientific Co. even provide for reimbursement of legal fees--in case the executive sues an acquiring company if it won’t honor the golden parachute.

In a growing number of cases, parachutes are extended to entire management teams, not just the chairman or chief executive. Companies with these “group” parachutes include Litton Industries, Henley Group, Advanced Micro Devices, Great American First Savings Bank, Genentech, First Interstate Bancorp, Farmers Group and Whittaker Corp.

A number of companies around the country--among them Mobil, America West, Diamond Shamrock and Herman Miller Inc.--offer so-called tin parachutes that provide benefits for all employees, non-management as well as management. Because companies are not required to disclose these tin parachute arrangements, Mercer-Meidinger-Hansen could not determine which California companies have them.

Some companies, such as Occidental Petroleum, Walt Disney Co. and Gibraltar Financial Corp., exclude their chief executives but include other senior executives. At least one California company, Amfac Inc., extends parachutes to its directors.

Of course, many firms eschew parachutes. Some executives clearly don’t need them. Columbia Savings & Loan Assn. Chief Executive Thomas Spiegel, fifth on The Times’ list of highest-earning California executives in 1986 with total compensation of $3.86 million, does not have a parachute. Why should he? He, his family and other company insiders control more than half of Columbia’s stock, making a hostile takeover highly unlikely.

Other firms, such as Avery International, provide parachutes but require that some of the executives receiving them actively seek new employment to receive payments.

The overwhelming majority of firms with parachutes, however, don’t require that executives seek new jobs. Some, in fact, may continue to make parachute payments even after the executive finds a new job.

These and other parachute benefits continue to arouse critics, among them shareholders, employees and some corporate executives.

“In the last couple of years, it appears everybody has installed golden parachutes for the benefit of (managements) but not for the benefit of shareholders,” said Thomas E. Flanigan, chief investment officer for the California State Teachers Retirement System, one of the nation’s largest pension funds and a shareholder of many firms with parachutes.

When allowed a shareholder vote on the plans, the fund has turned thumbs down in every case in the past two years, said Janice M. Hester, the fund’s corporate affairs adviser.

Parachutes are unfair, critics say, because ordinary workers on the shop floor often lose their jobs in takeovers with little or no severance pay. Top executives already are overpaid, these critics contend.

Furthermore, parachutes protect incumbent managements and reward mediocrity, critics say. Companies likely to be takeover targets often are poorly managed, they contend. Able managers who do get displaced in takeovers can find new jobs quickly since there is demand for executives with proven track records, critics argue.

“If you believe in free enterprise and competition, then managements should be competing . . . to make their stock price so high that nobody can take them over,” said Joseph F. Alibrandi, chairman and chief executive of Los Angeles-based Whittaker and a leading corporate critic of parachutes. “Stockholders shouldn’t be required to make sure that managements that haven’t performed can (earn high severance payments) before finding another job.”

Whittaker does have a parachute plan, but it is a group plan that only provides for employees to be credited an additional five years in the company’s pension plan. Alibrandi says he and other senior executives refuse to participate in any plan that would grant lump-sum payments.

Proponents State Case

Parachute proponents counter that the payments have become a necessity for corporations to recruit top management, particularly in industries with high merger and takeover activity.

It typically takes between six months and two years for top executives to find new jobs, said Gilbert E. Dwyer, president of a New York executive recruiting and counseling firm bearing his name. Executives’ demands for parachutes as a condition of taking a new job are met by companies in about two-thirds of cases, said Dwyer, a proponent of parachutes.

More important, Dwyer added, parachutes protect shareholder interests because executives with parachutes will worry less about losing their jobs in takeovers and instead will concentrate on getting the best deal for shareholders, instead of for themselves.

The Mercer-Meidinger-Hansen survey indeed shows that companies in industries with a high level of merger activity (such as banking) or frequent management changes (such as entertainment) offer parachutes more frequently.

Four of the seven (57.1%) entertainment companies surveyed had parachute arrangements. Of financial institutions, including banks, savings and loans and insurance firms, 64% had parachutes.

The parachute propensity of banks and S&Ls; can also be attributed to anticipation of the liberalization of California’s interstate banking laws in 1991, when many out-of-state banks may acquire California banks, suggested Randall W. Hill, who specializes in placement of financial-services executives for the executive search firm of Spencer Stuart.

“Golden parachutes are a defensive mechanism,” Hill said. “In such an uncertain time for financial institutions today, they’ve got to offer them.”

But some parachutes can be unfurled at even the slightest hint of a change of control. Financial Corp. of Santa Barbara, Valley Federal Savings & Loan Assn. and Great American First Savings Bank will activate parachutes for certain key executives even if an outside suitor acquires only 10% of voting shares. By contrast, Wrather Corp. requires a suitor to have 80% before its parachutes are opened.

Executives at Wickes and Consolidated Freightways will get parachutes if the company ceases to be publicly held. Executives at several companies, including San Diego Gas & Electric, Zenith National Insurance Corp., Westamerica Bancorp., Henley Group and Varian Associates, will open parachutes if the company sells certain assets, possibly even if no change of control occurs.

CooperVision and Far West Financial Corp. grant parachutes to executives even if they don’t lose their jobs in a takeover. “You don’t even have to jump off the plane” to get golden parachutes at these firms, said William F. Spear, technical professional at Mercer-Meidinger-Hansen.

Some firms, such as Brae Corp. and Zenith National Insurance, include consulting arrangements in parachutes. One of the most lucrative is that enjoyed by Merv Adelson, chairman and chief executive of Lorimar Telepictures. His parachute calls for him to serve as a consultant for five years after termination at half his full-time pay. His cash compensation in 1986 was $553,383.

Van Nuys-based Superior Industries International provides some added protection for its parachutes for three senior executives. Their lump-sum payment is assured because it is backed by a letter of credit, Mercer-Meidinger-Hansen’s McCullough said.

Who’s got the biggest parachute of them all? No one knows for sure, McCullough said, because only about 40 firms surveyed quantified the value of their parachute agreements or provided enough information about base pay, stock options, pension plans and other items to allow an independent determination.

Some companies obscure the agreements, McCullough said, noting that parachutes are mentioned in any of a number of spots in proxy statements.

But while exact dollar values are hard to determine, some plans appear quite lucrative.

CooperVision is among the more generous on base pay, awarding three senior executives five times their base salary. Great Western Financial Chairman James F. Montgomery and President John F. Maher would receive compensation and other benefits as if they had remained fully employed for five years.

Another generous firm is Walt Disney Co., which offers a variety of pay and benefits to Richard A. Nunis, president of three company theme park subsidiaries. Nunis’ package includes a portion of base salary and payments based on bonuses, stock options and pensions. Nunis’ parachute also includes reimbursement of legal fees and expenses.

Among those that do quantify parachutes, the award for the biggest goes to O’Brien of Consolidated Freightways. His $3.72-million plan is followed by Lockheed President Robert A. Fuhrman at $3.22 million, National Education Chief Executive David H. Bright at $2.72 million and Lockheed Executive Vice President Vincent N. Marafino at $2.63 million.

But singling out these executives as having the biggest parachutes would be unfair because others with more lucrative arrangements may not have disclosed their values, McCullough notes. The ones who disclose “are really the good guys,” he said.

ABOUT THE STUDY

William M. Mercer-Meidinger-Hansen reviewed the latest proxy statements of 239 of the largest companies headquartered in California. The companies chosen included those listed in The Times’ roster of leading California companies published June 7, 1987, as well as all publicly traded companies based in Orange and San Diego counties with annual revenues exceeding $100 million. Golden parachutes were defined as termination agreements triggered by a change in control as defined in Internal Revenue Code Section 280G. Other types of employment agreements not tied to changes in control were not included.

A GOLDEN PARACHUTE SAMPLER

List does not represent the largest golden parachutes, only those for which dollar values are disclosed or can be determined.

Company Executive Position H.F. Ahmanson Deihl, Richard H. Chief exec. Antoci, Mario J. President Kurtz, F. Anthony Sr. vice pres. American Seaton, W.B. Chief exec. President Cos. Anthony Forester, Bernard I. Chief exec. Industries BankAmerica Cooper, Thomas A. President Newman, F.N. Vice chairman Frick, Robert W. Vice chairman Taylor, G.E. Jr. Vice chairman Coombe, G.W. Jr. Exec. vice pres. Brae Texido, William J. Chief exec. Briscoe, Lawrence W. President Caesars World Gluck, Henry Chief exec. Lanni, J. Terrence President Schweitzer, M. Peter Vice chairman Ball, Philip L. Sr. vice pres. Lee, Roger Sr. vice pres. Clorox Weaver, C.R. Chairman Collins, J.W. President Lewis, S.N. Exec. vice pres. Bolingbroke, R.A. Group vice pres. Consolidated Ryles, Gerald F. President Fibres Erickson, Paul N. Exec. vice pres. McNally, Thomas C. III Vice president Consolidated O’Brien, Raymond F. Chairman Freightways Scott, Lary R. President Moffitt, Donald E. Vice chairman Curry, W. Roger Sr. vice pres. Kelly, John P. Sr. vice pres. Convergent Ely, Paul C. Jr. Chief exec. Technologies Yansouni, Cyril J. President CooperVision Montgomery, Parker G. Chairman Dornig, Joseph A. Vice pres. Fields, George J. Vice pres. CP National Agee, Ben W. Chief exec. Holmstrom, Michael E. Exec. vice pres. Litt, Marvin S. Sr. vice pres. Far West Financial Blackford, David E. President Green, Charles H. Exec. vice pres. The Gap Drexler, Millard S. Chief exec. Great Western Montgomery, James F. Chief exec. Financial Maher, John F. President La Scala, Anthony C. Exec. vice pres. Hoffman, E.R. Exec. vice pres. Marschalk, William J. Exec. vice pres. Imperial Corp. Thygerson, Kenneth J. Chief exec. of America Villani, Kevin E. Exec. vice pres. Haines, Stephen S. Exec. vice pres. Robbins, John M. Exec. vice pres. Kaiser Aluminum Maier, Cornell C. Chief exec. & Chemical Hutchcraft, A. President Stephens Jr. Nelson, Howard M. Sr. vice pres. Erickson, Jesse D. Sr. vice pres. Kerr Glass Mfg. Norian, Roger W. Chief exec. Lockheed Kitchen, Lawrence O. Chief exec. Fuhrman, Robert A. President Marafino, Vincent N. Exec. vice pres. Tellep, D.M. Group pres. Longs Drug Long, R.M. Chief exec. Stores Scott, R.A. Exec. vice pres. Plomgren, R.A. Sr. vice pres. Roath, S.D. Sr. vice pres. Madsen, J.D. Sr. vice pres. Micro D Lacy, Linwood A. Jr. Chief exec. Clark, Harold L. President Otuteye, Godfred P. Sr. vice pres. National Bright, H. David Chief exec. Education McNaughton, John J. Chairman Cwiertnia, J.W. Exec. vice pres. Laub, Wallace O. Exec. vice pres. Oak Industries Miller, S. James Jr. Vice pres. Occidental Irani, Ray R. President Petroleum Pacific Scientific Brower, Edgar S. Chief exec. Plat, Richard V. Sr. vice pres. San Diego Gas Page, Thomas A. Chief exec. & Electric Thomas, J.E. Exec. vice pres. Korpan, R. Sr. vice pres. Davis, A.T. Sr. vice pres. Baum, S.L. Vice pres. Shaklee Chamberlain, David M. President Matsushita, Masaaki Sr. vice pres. Superior Brown, Raymond C. Sr. vice pres. Industries Int’l May, Charles B. Vice Pres. Ornstein, R. Jeffrey Vice Pres. Tandon Wilkie, Dan H. President Ultrasystems Stevens, Phillip J. Chief exec. U.S. Leasing Mundell, D.E. Chief exec. International Valley Federal Headlund, Donald C. President Savings & Loan Laurin, Michael Sr. vice pres. Nelms, Dan E. Exec. vice pres. Allewaert, Jack R. Exec. vice pres. Wrather Rawls, Roy M. Exec. vice pres. Saenger, Eugene L. Jr. Exec. vice pres. Xidex Colbert, Lester L. Jr. Chief exec. Filler, Gary B. Exec. vice pres. Zaccaria, Bert L. Exec. vice pres.

Amount in Company Dollars* H.F. Ahmanson $2,340,000 1,488,000 555,900 American 1,299,000 President Cos. Anthony 1,199,400 Industries BankAmerica 1,303,583 825,000 900,153 999,209 677,828 Brae 2,957,200 770,742 Caesars World 2,004,505 1,559,273 380,000 528,268 528,268 Clorox 361,850 270,785 238,916 173,191 Consolidated 250,000 Fibres 200,000 123,000 Consolidated 3,723,895 Freightways 1,716,139 989,559 682,987 554,379 Convergent 577,500 Technologies 28,462 CooperVision 2,000,000 1,000,000 1,000,000 CP National 600,000 425,000 311,666 Far West Financial 825,000 445,000 The Gap 1,881,924 Great Western 1,082,475 Financial 158,200 258,646 249,202 158,282 Imperial Corp. 921,875 of America 135,400 124,114 90,826 Kaiser Aluminum 1,000,000 & Chemical 687,500 600,600 415,000 Kerr Glass Mfg. 1,455,900 Lockheed 2,475,610 3,218,102 2,632,673 2,247,153 Longs Drug 788,166 Stores 615,943 457,706 360,051 330,069 Micro D 352,000 164,940 183,000 National 2,716,760 Education 825,737 990,000 689,400 Oak Industries 280,000 Occidental 1,019,200 Petroleum Pacific Scientific 829,464 533,994 San Diego Gas 367,042 & Electric 196,500 170,416 150,792 164,375 Shaklee 1,365,148 644,020 Superior 525,000 Industries Int’l 345,000 300,000 Tandon 1,235,823 Ultrasystems 1,394,000 U.S. Leasing 310,000 International Valley Federal 334,978 Savings & Loan 243,058 241,063 245,571 Wrather 380,000 525,000 Xidex 955,640 936,100 922,408

* Amount based on latest proxy statement

** Includes maximum bonus. Source: William M. Mercer-Meidinger-Hansen WHERE THE PARACHUTES ARE

California California companies companies with Industry analyzed parachutes Percent Financial/insurance 36 23 63.9% Entertainment 7 4 57.1 Service 17 7 41.2 Transportation 11 5 45.5 Health care 15 6 40.0 Merchandising 14 5 35.7 Computers/electronics 55 19 34.5 Manufacturing 70 24 34.3 Utilities 8 2 25.0 Conglomerates 6 1 17.0 TOTAL 239 96 40.2

Source: William M. Mercer-Meidinger-Hansen

OTHER COMPANIES WITH GOLDEN PARACHUTES

Advanced Micro Devices

American Bldg. Maintenance Industries

American Medical International

Amfac

Arden Group

Avery International

Bell Industries

CalFed

Carter Hawley Hale Stores

Central Banking System Inc.

Cipher Data Products

Coast Savings & Loan

Community Psychiatric Centers

Comprehensive Care

Computer Sciences

Dataproducts

Di Giorgio

Walt Disney Co.

Farmers Group

Financial Corp. of America

Financial Corp. of Santa Barbara

Fireman’s Fund

First City Industries

First Financial Corp.

First Interstate Bancorp

Fluor

Genentech

Gibraltar Financial

Glenfed

Great American First Savings Bank

Grubb & Ellis

Henley Group

Hexcel

Hilton Hotels Corp.

Homestake Mining

Homestead Financial Corp.

ICN Pharmaceuticals

Litton Industries

Lorimar Telepictures

Mattel

Maxicare Health Plans

MGM/UA Communications

National Medical Enterprises

Potlatch

Priam Corp.

Products Research & Chemical Corp.

Security Pacific Corp.

Smith International

Standard Brands Paint

Stater Bros.

Tiger International

Times Mirror

Transamerica

Transcon

Unocal

Varian Associates

Watkins-Johnson

Westamerica Bancorp.

Whittaker

Wickes Cos.

Wynn’s International

Zenith National Insurance Proposed golden parachutes:*

Adia Services

Ashton-Tate

California Microwave

Citadel Holding

Emulex

Golden West Financial

Imperial Bancorp

International Technology

Earle M. Jorgensen

Kaufman & Broad

Micom Systems

New World Pictures

Printronix

PS Group

Ross Stores

Sizzler Restaurants

Southern California Edison

System Industries

Titan

Tosco

URS Corp.

World Airways

Wyse Technology * As of latest proxy

Source: William M. Mercer-Meidinger-Hansen