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Enormous Severance Packages for Executives Still a Hot Button

News Brief
September 30, 2011

By Cydney Posner

Here are two articles from The New York Times observing that executives continue to receive "eye-popping severance package[s] … in spite of the measures put in place in the wake of the financial crisis to crack down on excessive pay."

The most recent examples – and there are quite a few -- of so-called "pay for failure" have all involved eight-figure farewell packages to departing executives, some of whom didn't last even a year on the job. While Dodd-Frank now requires a separate shareholder vote on golden parachutes initiated by a merger or sale, there have been few battles so far. Even clawbacks have not been entirely successful. One of the articles reports that, after Beazer Homes settled with the SEC on fraud charges and its CEO was forced to repay about $6.5 million as a result of implementation of a SOX 304 clawback, the CEO was ousted: "But what the government took away, Beazer's board gave back. [The CEO] was awarded a severance package worth about $6.3 million — and was reimbursed for up to $10,000 of legal fees associated with his termination.

Both articles observe that one of the reasons given for the persistence of huge parachutes "is that corporate boards hire superstar chief executives, rather than groom strong managers inside the company for the top job. That gives outsiders a stronger hand to demand all kinds of upfront stock awards and lucrative severance deals when they are hired. So when things do not work out, that ‘golden hello' turns into a ‘golden goodbye.' " The second article, however, takes issue with that argument, contending that not all of these executives really need to be "lured." As one academic cited in the article explained, " ‘There's absolutely no empirical support for the idea that people won't move unless they get a lavish severance agreement. There may be some exceptional talents that need to be coaxed, but the idea that most executives need this is unbelievable. If you're a top executive in Silicon Valley, to become the head of H.P., the largest computer company in the world, is a coup. You don't need to be paid for failure.' Most people strive to better their circumstances by taking chances, often changing jobs without any guarantees that should they fail, they'll be paid anything — let alone lavishly. That, as [the academic] points out, is the essence of capitalism. ‘Imagine if you were applying for a job, and you said, "I want to make it clear that if I do a terrible job, I want to walk away with a ton of money." Do you think you'd get hired? Yet that's now standard practice in negotiating executive compensation.' "

The author's proposed remedy? "[I]n all employment contracts, ‘cause' should mean the standard dictionary definition (‘sufficient reason,' according to Webster's). It shouldn't have a specialized, absurdly narrow meaning only for top executives, such as conviction of a felony. In my experience, when language is seriously distorted — when Wall Street analyst ratings of hold actually mean sell — it's a sign of trouble.  "And the termination benefits extended to top executives should be the same for all employees. I suspect that would swiftly end the practice of bestowing multimillions on those at the top who fail. In my experience, most people don't resent high pay for outstanding performance. But lavish termination payments ought to be anathema to anyone who aspires to a just society. It's merit, and not failure, that should be rewarded."

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