Lucrative Cash Package Came as Fairchild Reported $53.2 Million Loss

Fairchild's chairman and chief executive, Jeffrey J. Steiner, has headed the firm since 1985. (Mitsu Yasukawa For The Washington Post)

Fairchild reported that the amount Steiner owed the company in 2003 never exceeded the amount that the company owed him as deferred salary.

Separately, Fairchild reimbursed Steiner for $75,000 of entertainment expenses "which benefit the company," Fairchild reported. That covered just "a portion" of Steiner's entertainment expenses, the company reported.

Other Payments to Steiner

Steiner could have taken home more money if the board had not stepped in, company filings show. Under an unusual incentive plan, Steiner was entitled to up to 2.5 percent of the money Fairchild received from selling pieces of itself. For the $657.1 million sale of the fastener subsidiary to Alcoa, that would have amounted to $16.4 million, the company reported. Instead, the board's compensation committee decided that he should get a $5.2 million bonus related to the sale.

The Steiners also negotiated a $5 million side deal with Alcoa in which they personally agreed not to compete with the business Fairchild sold Alcoa and to be available as consultants to Alcoa.

Noncompete payments are commonly made to employees with critical knowledge of a subsidiary's operations or customers, said John F. Olson, a corporate lawyer at the firm Gibson, Dunn & Crutcher LLP. Speaking generally, Olson said they are not typically awarded to chief executives who are primarily investors, financiers or turnaround specialists. He added that they can be used as inducements to get executives or major shareholders to go along with a deal.

"The burden of proof is really on the board to explain why that money belongs to the executives and not to Fairchild's shareholders," said Nell Minow of the Corporate Library.

John C. Coffee, a professor at Columbia Law School specializing in corporate law, said that, as a general matter, non-compete payments to chief executives or controlling shareholders when a subsidiary is sold can be a means of diverting to those individuals money that should go to all the shareholders as part of the sale price.

Asked whether Alcoa or the Steiners sought the noncompete contract, Alcoa spokesman Kevin Lowery said by e-mail, "No one can recall who first came up with the idea, but it's fair to say that at the end of the day it was a mutual agreement."

Lowery would not say how much time the Steiners have spent consulting for Alcoa.

On top of the other payments, Steiner received what is known in the parlance of the boardroom as a "change of control payment." Those are often triggered when an executive loses his job in a takeover. Also known as golden parachutes, they are commonly written into executives' employment contracts to compensate them for loss of their job or demotion if their company is taken over by another. They were invented to neutralize an executive's incentive to resist deals that might benefit shareholders but leave the executive unemployed, said Randall S, Thomas, a professor of law and business at Vanderbilt University Law School.

Fairchild reported that contracts of its executives entitled them to change of control payments if the company sold "substantially all of our assets," and Fairchild said the fastener business represented about 68 percent of its assets.

Steiner's employment contract also linked any change of control payment to the termination of his employment, according to documents filed with the SEC.

However, Steiner received a change of control payment without giving up his position at Fairchild. After selling the fastener business to Alcoa, the company struck a new deal with its chief executive, allowing him to receive half of his $6.3 million change of control payment in 2003 and the rest when his employment ends. In return, Steiner agreed to stay on the job.

Staff researcher Richard Drezen contributed to this report.