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Dismantling CEOs’ golden parachutes


It's nice work if you can get it.

Robert Marcus, who's been the CEO of Time Warner Cable since only Jan. 1 of this year, stands to receive nearly $80 million if the company's purchase by Comcast closes and he leaves his job, according to a regulatory filing issued last week. If Marcus ultimately receives the payout, it would be among the largest "golden parachute" benefits awarded since 2011, according to an analysis by executive compensation research firm Equilar.

It's been several years since the financial crisis ignited public outrage over CEO compensation and the SEC adopted rules from the Dodd-Frank Wall Street Reform and Consumer Protection Act that grant investors the right to vote on executive pay. But such eye-popping numbers beg the question, how much have CEO safety nets actually changed?

The short answer is: some, but not enough to fundamentally let the air out of those parachutes.

Yes, boards are under increasing pressure not to cushion CEOs' landings too much. New regulations, shareholder activism and greater public scrutiny are constraining what executives are in line to obtain. One recent study by the professional services firm Alvarez & Marsal found that among the largest 200 U.S. public companies, the value of golden parachute benefits have remained basically flat, going from $30.2 million in 2011 to $29.9 million in 2013, despite a booming stock market.

But until corporations change how they treat the piles of stock options and restricted shares that executives typically become eligible to receive — for instance, $56.5 million of Marcus's potential $80 million payday would be in equity form — lucrative golden parachutes are likely to remain fairly common.

"Unless you attack the biggest piece of it," says Paul Hodgson, an expert on executive compensation with governance research firm BHJ Partners, "you’re not really going to change anything." (A Comcast spokesman referred inquiries to Time Warner Cable, which declined to comment regarding Marcus.)

"Golden parachute" has become a generic term used to describe any big termination payment made to an executive, including severance paid after poor performance. But they first proliferated during the hostile takeover era of the 1980s and are most associated with what's known as a change-in-control agreement, or a payout given to executives due to an acquisition. Such benefits were originally designed as a way to get CEOs to evaluate potential mergers that might be good for shareholders without worrying about losing their jobs, or the cushy paychecks that went with them.

But as stock grants ballooned in the 1990s and 2000s, the size of these first-class escape hatches grew enormously — often far beyond what many would consider necessary to objectively assess potential deals.

"Somewhere that got distorted," says Carol Bowie, head of research, Americas, for proxy adviser ISS. That was especially the case as the world of mergers and acquisitions moved beyond the hostile takeover period and into an era of more friendly, strategic mergers. "There was a fear that these were becoming windfalls, in fact, for executives." 

While Marcus's potential payment is hefty, particularly given the short amount of time he's held the job, past golden parachutes have still dwarfed what he could receive. After Procter & Gamble bought Gillette in 2005, Gillette CEO James Kilts received $164.5 million in severance and benefits. John Kanas, meanwhile, was said to have gotten $214.3 million after selling North Fork Bank to Capital One in 2006, according to a 2012 analysis by governance firm GMI Ratings.

Some current CEOs could earn giant sums should their companies be acquired in the future. For instance, David Simon, the CEO of mall developer Simon Property Group, could potentially receive $245 million should his company change hands, according to the company's proxy statement from last year. Meanwhile, the change in control payment for Discovery Communications CEO David Zaslav, should that company be acquired and Zaslav lose his job, could reach $232 million. (Representatives for Simon Property Group and Discovery Communications declined to comment.)

Thanks to the Dodd-Frank law, shareholders now have an opportunity to vote down lofty safety nets in advance of an actual merger. But it's rare for a majority of investors to vote against these payouts, ISS's Bowie says. And even if they do, those "advisory" votes are non-binding, meaning companies don't have to follow through on shareholders' recommendations. 

Still, it does sometimes happen. An analysis by Equilar for the Washington Post turned up a $79.3 million golden parachute that former Cooper Industries CEO Kirk Hachigian, now CEO of Jeld-Wen, was in line to receive as a result of his company's acquisition by Eaton Corp. in 2012. Cooper's shareholders apparently weren't big fans of the compensation — 59 percent of the company's investors voted against the payment, according to a filing.

An Eaton spokesman said in e-mails that the advisory votes "have no binding effect" and that Cooper Industries "was obligated to make the payments based on contracts and arrangements" that predated the merger. Calls to Jeld-Wen to reach Mr. Hachigian for comment were not immediately returned.

Still, several recent studies show that shareholder pressure against golden parachutes is indeed having some impact. For one, companies that give executives extra money to cover excise taxes they might be hit with from their golden parachutes (known as a tax "gross-up") are becoming an endangered species. Executive pay consultants Pearl Meyer & Partners recently found that among the 50 largest public companies in the Fortune 500, the prevalence of tax gross-ups has fallen from 41 percent in 2006 to just 14 percent at the end of 2012.

More companies are also adding stipulations to the stock portion of change-in-control payments. Until recently, most were known as "single trigger" equity plans, meaning the acquisition alone — even if the executive kept his or her job — would automatically make the executive eligible to cash out his or her shares.

"Any change in control would have scheduled a termination payment, which is just the most insane thing you've ever heard," says Hodgson. The Alvarez & Marsal study found that 63 percent of companies in 2013 now have at least one equity plan that requires both the deal to close and that executives actually lose their jobs, what's known as a "double trigger," compared with just 28 percent in 2009. A new Equilar study also found the number of "double trigger" provisions on the rise.

Finally, the cash portion of many severance packages — which is typically two to three times an executive's average combined salary and bonus — appears to be declining, too. Fewer boards are choosing multiples of three or more when setting these rewards. "From an optics perspective, companies have reconsidered whether they need to offer" such big multiples, says Dan Wetzel, an executive pay consultant with Pearl Meyer. "Some have really pulled back from that."

Still, while these changes may help rein in golden parachutes, Hodgson says that until companies change how they deal with stock grants, lucrative payouts won't go away. "They're supposed to reward long-term performance," he says of executive stock options and restricted shares, which have long been described as incentive plans designed to retain executives and keep them focused on the long haul. "But if you're leaving the company, you're not contributing to the long term nor are you retained. They serve no purpose anymore. So why are we paying them?"

Hodgson acknowledges that doing away with them entirely is likely too radical for the industry. But with cash payouts equal to two or three years worth of salary and bonus (a benefit that easily climbs into several million dollars for many CEOs), he says it's worth asking why executives need all of their long-term equity payout, too. "If you've really just done such a fantastic deal for shareholders," he says, "you're going to be moving up the list of hot CEOs. It's not going to take you another two years to find a job."

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