Unpack the parachutes
Nothing brings out the populist streak in American politicians quite like a multimillion-dollar golden parachute for a failed executive. So it wasn’t surprising when lawmakers broke out the pitchforks and flaming torches after learning that Fannie Mae and Freddie Mac were making rich severance payments to their ousted chief executives. According to compensation consultant David Schmidt of James F. Reda & Associates, ex-Fannie chief Daniel Mudd stands to collect $6 million to $8 million, and ex-Freddie chief Richard Syron more than $15 million. Not bad, considering that Fannie and Freddie’s shares lost at least 90% of their value during their relatively brief tenures.
With taxpayers potentially having to inject hundreds of billions of dollars into the two mortgage giants, it’s hard to accept their executives departing with enough money to buy a subdivision’s worth of repossessed homes. What’s lost amid the din of protest is that Mudd and Syron secured their fabulous parting gifts on the way in, not on the way out. That’s a common practice in corporate America, where chief executives often persuade compliant directors to insulate them from the financial pain of an ignominious exit. And no matter how many angry statements lawmakers crank out, executives will continue to be rewarded for failure until public companies’ boards and shareholders insist that it stop.
We too would love to see Mudd and Syron sent off to the next stage of their careers with little more than a firm handshake. But the federal takeover of Fannie and Freddie (technically, the Federal Housing Finance Agency put them into a conservatorship) shouldn’t invalidate the contracts that the two men signed with the companies. The pair would be doing the right thing if they rejected the bulk of their severance payments -- especially Syron, whose contract included an unusual $8.8-million cash payment in lieu of his final year’s stock options -- but they should do so voluntarily.
Meanwhile, the controversy about the pair’s severance should help the growing number of corporate boards seeking to guard against paying for failure. Boards need to push back against top executives’ demands for employment contracts. If they can’t avoid a contract, they should make severance packages available only in the event of a buyout that is in shareholders’ interests. Too many contracts, like Mudd’s and Syron’s, provide ample rewards for executives even when they’re kicked to the curb for poor performance. If boards don’t do it, they run the risk that Congress will impose more regulations on executive pay or give shareholders more say over it. Better yet, shareholders may simply vote with their feet, investing in companies whose boards know how to say no.
