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I Don’t Understand Severance Pay
By JLP | November 5, 2007
This makes absolutely no sense to me.
Stan O’Neal was forced out as Merrill Lynch’s CEO due to the subprime mortgage crisis. Yet, according to this Wall Street Journal article ($), he will “walk away with $161.5 million in restricted stock, options and retirement benefits; he will also get a Merrill-paid office and assistant for three years.”
What the heck’s wrong with this picture?
That’s not it. Charles Prince stepped down yesterday as CEO of Citigroup in the midst of huge write-offs also due to the credit markets. His exit package?
Mr. Prince doesn’t have an employment contract or any specified termination benefits, beyond his pension. But he appears to be eligible to depart with cash and equity valued at roughly $31 million, according to Citigroup’s filings with the SEC. Most of that — roughly $28 million — reflects the value of approximately 744,000 shares of restricted stock that Mr. Prince was granted over the past four years, based on Friday’s 4 p.m. price of $37.73.
Source: Wall Street Journal: Citigroup CEO Plans to Resign As Losses Grow ($)
It’s crazy to me how CEOs aren’t being held accountable for their leadership or lack thereof. Giving a CEO an exit package of this magnitude really gives them no incentive to do what’s best for the company, its employees, and shareholders.
When most people get fired from a job, they walk out with a box full of their stuff, not a nice monetary gift. Why is it not the same for a CEO?
I’d like to know what you think should be done about CEO pay. Is it outrageous? Should CEOs be given severance packages?
Topics: Business News, Question of the Day | 21 Comments »
November 5th, 2007 at 2:30 pm
Nothing should be done about CEO pay. It’s a free market. If the company wants to pay that much to fire someone, so be it. My hat’s off to the CEO, he’s a great negotiator.
If the stock holders have a problem with it, don’t vote him in. If consumers don’t like it, vote with your dollars… don’t do business with the company.
No matter what, keep the government out of private businesses. Do you want the governement to come in and tell you how much you can pay someone, or your self? Think about it.
November 5th, 2007 at 2:41 pm
Jay,
Where in my post did I say anything about the government coming into the picture?
November 5th, 2007 at 2:55 pm
As a stockholder or anyone who could control the company I’d say no. Because most CEOs leave for gross mismanagement (at least with the whole severance pay thing). I wouldn’t reward them.
I think it’s part of a contract they sign when they’re hired which basically says that they can’t be fired without certain benefits. And companies want to sign it because they think this person will be great and it won’t be an issue (like a prenup for a couple that doesn’t divorce). Only they do divorce and the company realizes that the prenup was heavily weighted in one direction….
November 5th, 2007 at 2:58 pm
This seems to be a trend. Many CEOs are quitting (or are they just in the media more often?)…Time Warner’s CEO is stepping down now, too.
I don’t blame them. To actually work at improving your company sacrifices your time and family, and takes serious effort. Why bother? You get paid more than 99.9% of the population either way. I’m sure just throwing ideas into the air and ditching the company when it loses billions and then retiring on millions and millions of dollars of severance pay – so you can spend the rest of your life vacationing with the wife and the rugrats – is much easier.
November 5th, 2007 at 3:14 pm
While I agree that far too often, CEOs make out like bandits in these situations, some of it is not truly severance.
Charles Prince received the 744,000 over the past 43 years, so that was money under the bridge, so to speak.
It sounds like the same may be true for $161.5 MM that Stan O’Neal is walking away with. However, I don’t understand the 3 year office and assistant, but that could have been negotiated to get him on board.
Stock, options and benefits are usually where CEO compensation gets truly outrageous. However, not all everyone has gone the route of people like Eddie Lampert, who set a $5 MM max for executive compensation at SHLD. I am not sure how options and restricted stock factor into the equation in this scenario.
Finally, if you do a quick search, there are a number of companies that have set CEO pay at $0 or $1. However, other forms of compensation, stock and options, usually offset this so it becomes harder to determine their actual pay.
Having said that, I don’t think the stock and options route, as long as it is not excessive, is necessarily a bad route for most companies. The top executives getting compensated in a way that is only truly beneficial to them if the company does well should also be good for employees and shareholders.
November 5th, 2007 at 3:43 pm
I don’t think CEO pay is outrageous. Someone wrote an article recently entitled “Are CEO’s worth 273 times more than the average employee?” I can’t remember the exact figure (whether it was 273 or what), but my initial reaction to that question is “Of course they are!!”
Most CEOs and executives are compensated largely by company stock. That incents them to make the stock grow over the long term. So of course they should get to take it when they leave! Because of their mis-management, the stock has often tanked when they are forced to step down, so they are punished that way–the $30MM they get today might have been worth $60MM+ a few weeks ago, after all.
Besides, CEOs usually resign as a symbol. Does anyone really think it’s Chuck Prince’s or Stan O’Neal’s fault that the big financial companies are losing money accross the board right now? No-they’re scapegoats, resigning to convince stockbrokers and Americans that corrective actions are being taken and that they can rest easy.
So yes, I think they should get to have severance packages, just like every other employee. Sure, their packages are larger than the average employees’, but so are their salaries and responsibilities and talent.
November 5th, 2007 at 4:56 pm
JLP — Fair enough, you didn’t mention the government. I jumped to a conclusion. My appologies.
It seems there are more and more people who think the government can solve any percived injustice. Didn’t mean to group you in there.
November 5th, 2007 at 5:33 pm
Jay,
Thanks for coming back and clarifying that. I’m in NO WAY advocating more government control.
November 5th, 2007 at 5:38 pm
O’Neal was hired by Merrill Lynch to serve as CEO of that corporation. His $162 million contract was negotiated at the front end of the deal by the board of directors and himself. He had no stake in the company (except that much of that $162 million is in the form of stock options – if the stock goes up that amount could grow considerably). And while one can place blame on the board of directors, where it should lie, the reality is that finding a quality CEO is not cheap and the numbers of those people who can run a company of the size and scope of Merrill Lynch are very small.
I suspect a big part of the massive packages are negotiated are simply supply and demand. The supply of potential, qualified, interested CEOs is much smaller than the demand. The markets set the price.
November 5th, 2007 at 7:44 pm
Occasionally CEOs are not at fault. However, there are plenty of cases where CEOs are indeed at fault and yet leave with huge severance.
Most of you probably don’t remember John Akers who used to be the CEO of IBM in the 80s and early 90s. He was pretty stupid and he was largely responsible for the company’s problems in the early 90s. Yet when he was sent to a somewhat early retirement, he got a nice severance package.
I don’t advocate government control, and I don’t have problems with CEOs getting large salaries when they deserve it. But when they get paid for bad performance…
November 5th, 2007 at 8:01 pm
A lot of this payout is because the CEO is under contract for x years and the company wants them gone before it, or to make the break cleaner. Kind of like a payoff to play nice and leave quietly.
When I quit my last job they offered me a months salary to turn over all the information I had on my clients, and to point out the tasks that needed to be filled when I left because the managers didn’t know what I did all day, they just knew there was a group of clients, who paid every month and called me directly.
When (if) I leave my current job by January I am looking at getting a pay out near 2 months full salary. If I leave after that, due to a policy change taking place January 15th it will be about half that.
some companies just pay the money because CEOs who leave on bad terms can do a lot of damage on their way out if they want to.
November 5th, 2007 at 8:05 pm
I got laid off in May from an advertising agency. I made 50K as a PR Account Executive, and I left with my stuff in a bag. After I mailed the company my ID badge and parking pass, I got a wopping one week of pay along with another week’s worth of vacation I hadn’t taken. That’s it. Oh, and the best part, they laid me off AFTER they found out I DIDN’T have breast cancer.
Know what I asked them as they shoved the “separation agreement” in my face?
“Tell me … would we be sitting here if my results had been different?”
Note to readers: I had traveled to Johns Hopkins for a second opinion and surgery – that’s how they knew.
Note to self: NEVER, EVER share your business NO MATTER THE SUBJECT with employer EVEN IF THEY SEEM SYMPATHETIC AND HUMAN. They’re not.
November 5th, 2007 at 10:26 pm
[...] What do we get? Nothing. JLP takes a look at some recent CEO severance packages. {via: All Financial Matters} [...]
November 6th, 2007 at 12:13 am
surprised by some of the answers. of course, ceo $$ packages are obscene. no other way to put it.
November 6th, 2007 at 2:15 am
The problem is that if you don’t give these sorts of things, you can’t hire another CEO. Would an A-list manager want to be Citibank’s CEO if he knew that he’d get zilch when things go south, as they inevitably will?
Very few modern CEOs actually retire or step down voluntarily.
November 6th, 2007 at 11:45 am
I seem to recall that Jim Sinegal, CEO of Costco “only” receives $350k in salary yearly. Less than some of his fellow board members. True he gets a bonus and already owns millions in stock due to his co-founding status, but his yearly salary and bonus is less than $1m.
A recent interview on 20/20 ish type show quoted him as saying why should he get 15x more than the average hourly employee?
As a shareholder, I would vote for him to get a raise.
November 6th, 2007 at 1:43 pm
Of course they are. Anyone who has ever had to write one of these contracts or deals with c-level types all the time knows the answer can only be yes.
This all comes down to one thing: bargaining power. Very few of us have employment contracts. Most of us are at-will employees. These execs have guaranteed contracts that define very narrowly what termination “for cause” means. It’s the same thing in sports. Do you think athletes would make anywhere near the money they do if they didn’t have guaranteed contracts?
The ability to get a guaranteed contract comes down to bargaining power. Pure and simple.
November 6th, 2007 at 1:52 pm
Oh one company that I wanted to mention as being top notch when it comes to CEO’s pay is Ben and Jerry’s. They have a policy in place that the highest salary in the company cannot be more than 8 time the lowest. So if a CEO wanted a Million a year, the lowest employee has to make at least 125k this excludes stocks and stuff i believe, but it is a nice way to keep everyone in a good place.
November 6th, 2007 at 9:29 pm
Some are clearly worth a lot: Steve Jobs comes to mind. Most are mediocre and deserve pay tied to performance. They don’t deserve overcompensation because they are members of the country club network. And they certainly don’t deserve excessive compensation when they are fired!
January 28th, 2008 at 12:28 pm
I believe this foolishness has become a horrific business practice which has lead to the undermining of American business. The footings of businesses are being pulled out from beneath them. It is also happening at univesities across the country. These are sad times indeed when blackmail and greed of such magnitude is acceptable.
I believe a review and validation on salary and severances – is needed just as Sarbanes-Oxley was so sorely needed.
February 16th, 2008 at 2:06 pm
Maggie Raye, I don’t think you could be further from the truth. SOX is a terrible piece of legislation that is the poster child for why private enterprise needs to self-regulate, if they don’t the government will step in and make up the most asinine rules that add costs to the consumer and make domestic companies less competitive with foreign competitors.
Indeed, CEO severance packages are extreme in some cases but the solution is up to the shareholders. The packages have their place as shown by the deal given to Aloha Airlines CEO Dave Banmiller (http://starbulletin.com/2005/07/27/business/story2.html) but should be examined closely by the Board before approval and made sure to be tied to company performance versus peers.