The Upside of Being Out

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, April 26, 2007

For many top executives, losing their jobs could be lucrative.

For Sprint Nextel chief executive Gary D. Forsee, it could trigger as much as $73.8 million in pay and benefits, depending on the circumstances. An excise tax would take a bite out of that sum, but it would not be Forsee's problem. Sprint would cover the bill at a cost of $16.1 million.

For Danaher chief H. Lawrence Culp Jr., unemployment could trigger a payday worth as much as $103.5 million, plus $23.3 million of tax reimbursements.

For General Dynamics chief Nicholas D. Chabraja, termination could come with $62.7 million of consolation. If he left voluntarily after a takeover, he would be entitled to a windfall, too. The immediate vesting of his stock options would have been worth $11 million at the end of last year.

Golden parachutes and other rich severance deals have long made headlines after executives have been forced out, but new government regulations are requiring companies to disclose more clearly this year what executives had the potential to pocket at the end of 2006 under a variety of hypothetical scenarios.

Generally, it does not pay to be fired for cooking the books or embezzling, but absent outright misconduct, departing can be sweet.

Among other scenarios, the disclosures show how much executives stood to profit if their companies were taken over.

Companies say such "change-in-control" arrangements, as they are known, are warranted to ensure executives don't try to protect their jobs at the expense of shareholders. Negotiating the sale of a company might produce gains for stockholders, but it can leave a chief executive out of work or in a diminished role.

"These golden parachutes are part of the grease that lubricates the whole system," said David L. Yermack, a finance professor at New York University's Stern School of Business. When undervalued or underperforming companies are bought out, "it's a way of getting incompetent people out of the way so more productive management can put the assets to better use," Yermack said.

"When I talk about these things in class, I usually compare them to movies about the Mafia: 'You gotta let me get my beak wet,' " Yermack said, using "Godfather"-speak for skimming a share of the proceeds.

John C. Bogle, founder of the Vanguard Group of mutual funds, said some change-in-control packages have gotten outrageously large and can create perverse incentives.

"They've gotten just so extreme and so over-the-top in amount that I guess the executive . . . almost has to bring a little slide rule to work each day and say, 'Is it better to have the company taken over and get these huge payments, or is it better to hang onto my job?' "


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