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Post Leadership
Posted at 07:42 PM ET, 09/30/2011

Big payouts for booted CEOs


Carol Bartz and Leo Apotheker, of Yahoo and HP respectively, are two of the most recent CEOs to get be payouts after being ousted. (Paul Sakuma - AP)
Leo Apotheker may have been sent packing from HP last week. But when he leaves, his bags will be a little heavier.

Despite being summarily ousted after just 11 months of service and presiding over a 45-percent decline in the company’s stock and strategic moves that have left many investors scratching their heads, he will be awarded a severance payment of $7.2 million. According to an SEC filing, he will also receive an annual bonus under the company’s “Pay for Results” plan of $2.4 million. The company will accelerate the vesting of 156,000 shares of restricted stock with a value of $3.6 million and award Apotheker 424,000 of the “performance-based restricted stock units” that were part of his employment agreement. (Whether any payouts of those shares are made will depend on whether certain performance metrics are met.)

And that doesn’t include other benefits the company will bestow on him. Apotheker will receive 18 months of medical and dental coverage. He will be reimbursed for reasonable legal fees and other costs needed to negotiate the severance agreement, be covered under HP’s expatriate tax equalization program, and have his relocation expenses (including up to $300,000 for any loss on the sale of his California home!) paid back. HP is even footing the bill for the return airfare for Apotheker and his wife to France or Belgium. Au revoir, monsieur!

This is not, of course, a case of HP’s board suddenly feeling generous. Apotheker’s terms of severance were laid out in his employment contract from last September. He’s also not the only one: When Carol Bartz was uncermoniously fired on Sept. 6, she walked away with a package that will top $10 million. CJ Fraleigh, the former CEO of Sara Lee’s North American division, received $11.3 million after being forced to resign in September. And the CEO of home builder Beazer Homes, Ian McCarthy, got $5.2 million when he was terminated by the board in June.

The New York Times today looks into why such golden goodbyes continue to happen, despite increased regulation on executive pay and greater scrutiny of such outsized compensation by the SEC and activist shareholders. Perhaps investors have simply become accustomed to big payouts. Or maybe it’s because the Obama administration’s pay czar has moved on to other issues. Another possible reason: Regulators are focused on denying severance when a company is about to collapse, when it’s an issue plagues companies of all stripes.

The story also proposes that perhaps the biggest reason is that companies don’t focus enough on grooming successors, and are forced to lure in star CEOs with hefty sign-on bonuses and cushy backstops should things go wrong. But there’s no “perhaps” here, in my opinion. There’s no question that the reason we still have this problem is that when things go wrong, too many companies automatically turn to expensive outsiders.

All the regulation in the world won’t fix what ails the problems with executive pay in Corporate America. The only way to truly change the system, I believe, is to get companies focused on grooming the talent they already have. A company whose leadership bench is so weak that they feel they must agree to pay $10 million to someone who fails has much bigger problems than just who the next CEO will be. Until boards have a strong succession plan in place, there’s always a risk they’ll find themselves having to overpay for an outsider.

Perhaps HP’s board learned something this time. Meg Whitman, the former eBay CEO, gubernatorial candidate, and HP director-turned CEO, will be paid just $1 a year in salary, though she’ll have the option to buy 1.9 million of the company’s shares and be eligible for a target $2.4 million performance bonus. If for some reason the board decided to oust her too one day, her severance payment will equal 1.5 times (down from two times) her salary, plus an average of her bonus in preceding years, which should make any eyebrow-raising payouts less likely.

More from On Leadership:

Service to America medal goes to young Treasury sleuth

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By  |  07:42 PM ET, 09/30/2011

 
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