Why Departing Executives Don't Deserve Lavish Deals

Despite a rash of new corporate-governance guidelines, chief executives are still reaping huge severance deals, even when they are forced out.

Richard H. Brown, 55 years old, who was ousted in March as chairman and CEO of Electronic Data Systems, Plano, Texas, will receive severance totaling more than $32 million in cash and stock. The package will require the computer-services company to take a charge of six cents a share in the first quarter. EDS's share price, meanwhile, has fallen 75% in the past year as a push into the now troubled airline and telecommunications industries went awry. In addition, the Securities and Exchange Commission is investigating EDS's financial dealings and disclosures.

Milan Panic, 72, founder and decades-long CEO of ICN Pharmaceuticals, Costa Mesa, Calif., resigned in the summer of 2002 after his slate of directors was defeated in a proxy fight. He is still wrangling for a richer severance than is in his contract.

Under that agreement, he is entitled to receive a $5 million lump-sum severance payment and a $670,000 annual consulting fee for the remainder of his life. That is on top of the $33 million bonus Mr. Milan received in April 2002 after completing the sale to the public of a 20% stake in ICN's Ribapharm unit, which holds rights to a valuable drug used in treating hepatitis C.
Richard J. Kogan, 61, departing CEO of Schering-Plough, is entitled to receive $13.2 million in severance and $26.4 million in retirement payments when he steps down soon, despite a slumped share price and a pending SEC investigation at the pharmaceuticals company.
J. Harold Chandler, 53, fired recently as chairman and CEO of UnumProvident, the nation's largest disability-income insurer, will receive severance of $8.5 million and pension benefits of $8.5 million. Share price of the company, based in Chattanooga, Tenn., has plummeted in recent months as regulators question its claims-handling practices and investment portfolio.
Many of these severance deals, to be sure, were negotiated years ago when the CEOs were first recruited or promoted to the corner office, and can't be rescinded without a legal battle. "They are the residual effects of the boom years when CEOs were treated like star athletes and celebrities," says Carol Bowie, director of governance research services at the Investor Responsibility Research Center in Washington.

Yet corporate directors still haven't put the brakes on runaway executive pay and the practice of guaranteeing CEOs golden parachutes even before they prove their worth. They are out of step with investors and employees, who are angry over watching big payouts for sometimes inept performances, while their investments shrivel, their jobs are cut and they must leave their work with no package at all.

Their anger is showing up in a spate of shareholder resolutions aimed at restricting lush severance deals and seeking the right of investors to vote on golden parachutes.
Recently, Hewlett-Packard's shareholders narrowly approved a proposal urging directors to seek investor approval for any severance package valued at more than three times the executive's base salary plus bonuses. H-P said its board would "duly consider" the nonbinding recommendation, which is all it is required to do. CEO Carly Fiorina had opposed the proposal on the grounds that it could put the company's recruitment efforts at a "competitive disadvantage."
In March, shareholders at Tyco also passed a resolution seeking the right to vote on executive severance deals. Similar resolutions will be voted on soon at United Technologies, Citigroup and Alcoa. Ms. Bowie says she and her colleagues at the Investor Responsibility Research Center are monitoring such resolutions at a total of 18 companies this year. "It's a sign that boards are under more scrutiny -- but we're not yet out of the environment that anything goes when it comes to executive pay," she says.

More than limiting lush severance deals for executives, it's time to do away with them altogether. "If a prospective CEO on the way in to the job demands this, he or she may not be the right person to begin with," says Charles Elson, director of the University of Delaware business school's Weinberg Center for Corporate Governance.

He disagrees with Ms. Fiorina that eliminating severance will hurt companies' ability to attract executive talent. "I don't believe someone will turn down a top job offer because there is no guaranteed multimillion-dollar severance," he says. "Very few of us are assured that we will be paid for failure -- and directors have to start saying no, which takes some strength and independence."

That is what he and other directors at Nuevo Energy in Houston found when they recruited James L. Payne, 66, to become chairman, president and CEO two years ago. Mr. Payne, former vice chairman of Devon Energy, agreed to the take the job at Nuevo Energy without a severance agreement or other special perks. He also received Nuevo common stock, rather than cash, in compensation in 2002, equal to about $400,000 in salary and $200,000 in bonuses.