A story Sunday may have resulted in a misunderstanding of the terms of the severance package offered to Gillette Co. employes. Under the severance agreement, in the event of a takeover, the maximum payable to most employes, including benefit payments, is 2.99 times the average annual compensation for the preceding five-year period. (Published 7/1/87)
In the end, it seemed as if Richard J. Ferris, chairman of Allegis Corp., couldn't do anything right. But when the day came for his ouster from the company he had been with for 17 years, he floated quietly away, his "golden parachute" unfurled -- all $3 million worth of it.
It wasn't a reward for outstanding performance. In the last few months, it became clear that Ferris had big problems. From the inner sanctum of Wall Street to his own pilots' union, there was opposition to his plan to build a travel empire of airline, hotel and car rental services. His critics didn't even like the new name he chose for the company that owns United Airlines.
Ferris's payment was far from unique. Today it is common practice for top executives in America's biggest and best-known corporations to fall from grace cushioned by the type of generous severance payment that has come to be known as a golden parachute. From former Bendix chairman William Agee, who snared one of the first highly publicized parachutes in 1983, to Jim and Tammy Bakker, who requested a rich severance package when they were ousted from their PTL ministry, it seems as though no one likes to leave empty-handed.
"A lot of golden parachutes are rewards for leaving, and they are way out of line with individual worth or contributions to the company, particularly where a chief executive officer has mismanaged the company over time," said Peter Scotese, who retired last year as chief executive of Springs Industries of Fort Mill, S.C., and who is a member of numerous corporate boards.
Not so, say defenders of parachute payments. "They are very important and very justifiable," said Gilbert Dwyer, president of Gilbert Dwyer & Co., a New York executive recruiting and counseling firm. Dwyer said that in the event of a raid on the company, the parachutes free senior executives to concentrate on negotiating the best deal for the shareholders instead of themselves.
Companies that provide parachutes for their executives also say they are a recruiting tool in the topsy-turvy world of mergers and acquisitions, where deals worth a total of $190.5 billion were closed last year. Management consultants estimate that it can take six months to a year for managers at top levels to find jobs, prompting candidates for high-level positions to look for companies that offer some sort of protection in the event of a takeover or other changes.
In fact, the mushrooming growth of parachutes over the last few years is a direct result of corporate merger and acquisition fever. As friendly and hostile deals are consummated with the stroke of a pen, some of the most secure jobs at America's best corporate addresses have been eliminated. Acquisition Fever
In response, companies that find themselves in a takeover battle either make sure their senior executives already are assured a safe landing in the event of a change of control at the company or rush to put in such protection during the heat of battle.
"Severance issues used to be dealt with on a gentlemanly basis," said E. Webb Bassick, a partner with Hewitt Associates, an executive compensation firm. "But we have entered such a fierce environment of competition with unfriendly raiders that the gentlemanly ways have been tossed out."
Originally, parachutes were billed as weapons that companies could use to discourage pesky suitors -- a threat that has proven to be virtually worthless in the multimillion-dollar corporate takeover game. "It's like a mosquito bothering an elephant," Dwyer said.
Instead, they have become yet another perquisite of power in the executive suite.
JWT Group Inc., the advertising agency that agreed last Friday to be acquired by WPP Group PLC, quickly resorted to approving "severance agreements" for 26 key employes when WPP first came calling. The agreements guarantee cash equal to triple the employes' salaries and other benefits for three years. Gillette Co., a veteran of the takeover wars, already has in place a parachute billowy enough to triple almost all its employes' salaries for five years. Revlon is trying to buy Gillette for the second time.
Other companies with gilt-edged names have followed suit. Merrill Lynch Inc., CBS Inc., Baxter Travenol Laboratories Inc. and scores of others now routinely offer some special compensation for executives who leave top offices either because of a change in management or for other internal reasons. Though the intent of employment contracts supposedly is to attract and keep executive talent, many have clauses that compensate managers when they leave as well. More than 40 percent of major companies now have parachutes, according to Bassick.
Increasingly, top executives do not need battle scars from a takeover fight to qualify for a parachute. Getting thrown out by the board of directors, for instance, also can result in a lucrative parachute.
Like Ferris, who fell out with the Allegis board, former CBS chairman Thomas Wyman departed with a parachute -- one so generous, in fact, that its value can only be estimated. Michel Vaillaud, who was chairman of Schlumberger Ltd. as the oil-service giant was being ripped apart by family feuding, was ousted with at least $5.6 million.
Others get juicy retirement packages. Indeed, some of the richer going-away presents have gone to such executives as former E.F. Hutton chairman Robert Fomon, who headed the brokerage firm during the worst scandal in its history. When he retired last May, Fomon got $4 million in cash, then a subsequent award of $465,000 annually in additional pension benefits and a consulting contract with Hutton that could be worth $3.5 million. His annual salary was $1.25 million a year.
The Rewards of Scandal
Similarly, the housecleaning on Wall Street that has been going on as a result of insider trading scandals also apparently has its rewards -- just or otherwise.
When General Electric Co. replaced the top management of its Kidder, Peabody Group subsidiary last spring after an internal investigation of the brokerage firm's role in the insider trading scandal, the company said it would honor the employment contract of former chief executive officer Ralph DeNunzio.
Kidder this month agreed to pay the federal government $25.3 million to settle allegations that it made millions of dollars in illegal insider stock trading profits, which were amassed during DeNunzio's tenure, although he has not been accused of wrongdoing. GE, which owns 80 percent of Kidder, would not disclose the amounts involved in DeNunzio's contract.
Whatever their name and rationale, parachutes are growing in size and number in the top echelons of business.
A study of 1,500 companies completed last year by Dwyer's firm showed that more executive employment contracts were written in 1985-86 than during any previous two-year period. They protected a larger number of executives within firms, and their potential cost grew to an estimated average of $4 million, with the most generous costing about $60 million.
Most of the golden parachutes, which usually provide for a healthy multiple of current salary and a variety of benefits, were installed to cushion a drop from the corporate hierarchy after a takeover, the study showed. But a third could be triggered by loss of a job for any reason.
Both the size of contracts and their growing number have placed them at the center of a debate over the proper pay for a chief executive officer -- both on and off the job.
"From the beginning of time and forever the question will be how much is a good man worth and how little should a bad one be paid," said Agee, who popped open a $4 million parachute after he sold Bendix to Allied Corp.
Harvard University economist Robert Reich views parachutes as a form of bribery that suggests managements would not act in the interest of shareholders if they were not given an extra bonus. He also thinks they hurt productivity.
"Corporate managers are in the habit of feathering their nests, often at the expense of day-to-day production workers," said Reich. "Workers look at golden parachutes and say, 'Why should I knock myself out for this company?' "
Indeed, as companies go through the painful process of scaling down and restructuring before and after takeovers, some workers harbor hard feelings over the 14-karat gold found in the parachutes of some of their former bosses.
The union leadership at Time Inc., for example, is unhappy with a $4 million severance package former Time Inc. chairman Ralph P. Davidson is collecting now and after his retirement from the board at the end of next January.
Among other payments, Davidson, who is 59, will receive a $415,000 guaranteed salary until his retirement, as well as a bonus, a two-year consulting contract, pension benefits and $18,500 in legal fees to cover negotiating the agreement. His salary was $573,799 in 1986.
"I think it's an expensive squeeze play at the top at a time when many people are losing their jobs at the company," said Key Martin, the Newspaper Guild of New York unit chairman at Time Inc.
Similarly, employes at CBS who have lost their jobs in cutbacks since Laurence Tisch took over as chief executive looked askance at Wyman's settlement with the network's board.
The deal Wyman cut included $808,654 in salary; a $293,859 bonus; office space and a secretary during 1987; life and medical insurance that will decrease for the duration of his life; $400,000 a year for life in an annuity that would be worth $9.2 million if the 57-year-old Wyman lives until 80; "bonus credits" of $555,756; a lump sum of $2.8 million or 10 installments worth $3.8 million, and exercise of stock option rights.
Van Gordon Sauter, president of the troubled CBS news division, left with his $250,000 annual salary guaranteed through Sept. 30, 1990, as well as bonus payments. Several other CBS executives have employment contracts, some with special provisions that protect them in the event of a takeover.
The Washington Post Co. also has provided departing top executives with packages that ranged up to $1.8 million. A company spokesman, however, noted that the current president of the company, Richard Simmons, voluntarily gave up his parachute at the end of 1984 and that an employment agreement for another senior executive expired and was not renewed.
Not all parachutes qualify as truly golden. There are silver ones, like the one installed by the airline America West covering 5,000 workers. "We put it in to relieve the anxiety of our employes and send a strong message to potential buyers," said Mark Coleman, America West's senior vice president for market planning. Herman Miller Inc. and other companies have similar plans that up the ante for an acquiring company.
Beneficial Corp. of Wilmington, Del., has taken a slightly different approach by covering a broad band of middle-management employes -- all 339 of them this year -- at a potential cost of $53.8 million. "Middle management really gets crushed in a takeover," said Finn Caspersen, chairman of Beneficial. "This is a middle America parachute."
So-called pension parachutes also have come into vogue as a weapon against takeovers, allowing target companies to vest employes more quickly or to improve benefits so acquiring companies cannot capture pension funds as part of their raid.
But the ones that really raise eyebrows are those that are stratospheric, such as the $35 million that Michel Bergerac, Revlon's former chairman, took with him when raider Ronald Perelman -- who again is hot on Gillette's trail -- deposed him and put an end to his lavish corporate lifestyle.
Some shareholders and critics of parachutes in general also get irate over how they are installed. Although by law such packages have to be disclosed in companies' proxy statements, many of them are nearly impossible for the average shareholder to understand readily.
Another sticking point is when parachutes are approved. Many a sudden exit of an executive who has been told to clean out his suite comes with a last-minute parachute approved by a sympathetic board. "Some of these benefits cannot be ascertained until we come to the moment of truth," said Graef Crystal, a professor of organizational behavior at the University of California's business school.
Finally, there is the question of who pays. Though parachute supporters say they are too small to matter relative to a company's assets or the prices struck in takeover deals, some experts claim that paying parachutes detracts from the value of the company, so that shareholders ultimately get less.
To avoid some of these problems, a number of companies are keeping severance agreements reasonable, abandoning them altogether or, in a few cases, putting them to a shareholder vote.
Nine executives at Bethlehem Steel Corp., for example, asked that their parachutes be terminated, eliminating their guarantee of cash, legal fees and insurance if the company were bought, said a Bethlehem spokesman. The company has been losing money for the last five years, and some shareholders questioned the need for the agreements.
Changes in the tax law in 1984 that imposed penalties on excessive parachutes may have moderated some payments, though some companies pick up the extra tax that the recipients have to pony up for "excess" payments.
Reducing Some Contracts
Legal attacks by shareholders have not had much impact, but in a few cases state court decisions have shaved the size of contracts. At Beatrice Corp., for example, parachutes for six top officers and 54 others were trimmed by $23 million in a settlement with shareholders last year, although some top executives still got handsome payouts. In a settlement with Signal Cos. Inc. shareholders, about $25 million was returned to the corporate coffers.
Some parachutes have been wrested away from executives when their agreements are challenged by management itself. After revelations in the press that former Allegheny International Inc. chairman and chief executive officer Robert Buckley allegedly was spending corporate funds extravagantly, he resigned last summer and the company terminated his contract, worth about $1.8 million.
In a statement, Buckley said he had lived up to the terms of his contract and that he is "entitled to the compensation and vested rights in the company's benefit program which I have earned." A spokesman for Buckley said he is negotiating with the company to have the contract enforced.
Since shaming managements into stowing their parachutes has not seemed to work -- everyone from corporate raiders to institutional investors have taken shots at the agreements -- Congress is trying to poke a few holes in them.
In legislation that has been introduced in the House and Senate to curb abuses in the takeover wars, parachutes would be subject to a variety of restrictions: Votes by shareholders, a ban on parachutes approved during a tender offer, a stipulation that they must be held within the perimeters of the tax laws.
But many think that the most sensible solution may be simple self-restraint and fair dealing with employes and shareholders -- more generous severance agreements for all employes and better uniform disclosure of parachute pacts.
"You can't argue that people should get something when they leave," said Howard Sherman, a senior analyst with the Investor Responsibility Research Center. "But the question is, how much is fair?"
To that, David Dunn, chairman of Prime Computer Inc., said simply: "A year's salary would not be unreasonable. Beyond that, it's unpalatable to me."