Where Parting Is Such A Sweet Deal
When Phillip B. Rooney stepped down as CEO of long-suffering WMX Technologies Inc. last month after pressure from investor George Soros, corporate-governance types congratulated themselves. The system, they said, was working.
Working for whom? On Mar. 14, WMX disclosed in its annual shareholder proxy statement that the departing executive would get a $2.5 million salary in each of the next five years, thanks to the board's interpretation of the terms of his contract. Says director Peter H. Huizenga of the deal: "It is one of these things you have to live with."
Apparently. In the current environment of soaring stock prices, megamergers, and restructurings, Rooney's cushy exit deal isn't unusual. As the proxies roll out, such deals are surfacing across Corporate America. Ironclad employment contracts and friendly boards mean departing executives--whether retiring, quitting, being merged out of a job, or getting the boot--are leaving with full pockets. "There's got to be something wrong with the system," says compensation expert Graef "Bud" Crystal. "People are being allowed to dictate terms that give huge rewards under all [situations], including abject failure."
Crystal should know, since he had a hand in weaving the most outsize platinum parachute so far--Michael Ovitz' estimated $94.5 million in cash and options from Walt Disney Co. That was Ovitz' compensation for being forced out as president after 14 controversial months. His payout drew a protest from shareholders at Disney's annual meeting.
SECURITY BLANKETS. Executives don't have to be that high-profile to get sweet deals, though. Mattel Inc. Chairman John W. Amerman, who retired as CEO in 1996 after a well-regarded 10-year tenure, negotiated a deal that helped protect him from a disappointing final year. The toymaker's failure to meet internal targets meant that Amerman didn't earn an award under the 1996 incentive plan. No matter: The board gave him a "special achievement bonus" of $370,000 for goals achieved in 1995. He was also named part-time "senior adviser" to CEO Jill E. Barad through 1998, at $1.1 million a year--his CEO salary.
Clearly, executives are using any new contract talks as an opportunity to protect themselves from any eventuality. Better corporate governance means top jobs are more at risk than they've been in the past, so execs are trying to compensate in advance. "There's great insecurity, and perhaps some people are overreacting by making splendid arrangements," says Pearl Meyer, president of pay consultants Pearl Meyer & Associates Inc.
Occidental Petroleum Corp. Chairman Ray R. Irani is a case in point. In 1991, Irani negotiated a deal so that when he decides to retire, he'll get 50% of his highest annual compensation--including salary, bonus, and restricted stock--for life. Since he made $6.6 million last year--including an extra $1.2 million to cover California's high personal income taxes--it should make for a comfortable post-executive lifestyle. The company referred questions about the payout to the proxy, which points out that Irani has remained at the same base salary since 1992.
Even executives who wind up out the door as a result of mergers are rarely out of the money. Take David M. LeVan, chairman of Conrail, who will parachute home with a $22 million buyout of his five-year contract if Conrail's merger with CSX Corp. goes through as now planned. Drew Lewis, who left Union Pacific Corp.'s top job last year, was another winner. UP's successful merger with Southern Pacific Rail Corp. earned him a special $4 million bonus. That came on top of a $1 million salary, a $2 million regular bonus, $131,000 in tax paybacks, and a $3.75 million, five-year consulting deal. Board members say Lewis gave UP "a solid foundation to grow."
Another merger millionaire is former Shawmut National Corp. CEO Joel B. Alvord. He collected a severance package of $15.5 million in cash plus options and $1.5 million in benefits in 1996, following Fleet Financial Corp.'s 1995 purchase of Shawmut. The payout included a $1.5 million bonus "in recognition of Mr. Alvord's long-term valuable service to Fleet"--although he was Fleet's chairman for just 13 months. Fleet says the proxy speaks for itself.
Stepping aside early to allow someone else to ascend to the throne is another justification for big payouts. That's the case with BellSouth Corp. CEO John L. Clendenin, 62, who retired on Dec. 30 after 13 years in the top slot. In addition to his $2.7 million in pay plus options, Clendenin got a $3 million bonus to retire early. Although BellSouth's 1996 earnings performance led its peers, its stock fell 7%.
KEEP ON PERKING. You might think a departing CEO would be happy with a fat final paycheck and some options. But some execs use the exit contract to spell out a few final perks. When CEO Michael D. Pickett's contract with computer wholesaler Merisel wasn't renewed in 1996, among the goodies he got to keep was a Porsche with a cellular phone. He also specified that his crystal chess set and popcorn popper would go home with him.
According to General Electric Co.'s latest proxy, CEO John F. Welch, who collected some $28.2 million in salary, bonus, and exercised stock-appreciation rights last year, is doing some detailed retirement planning. When he steps down in 2000, he'll work up to 30 days a year as a part-time "ambassador" for GE, paid at a rate equal to his departing daily salary. He'll also have use of all GE facilities--from the copier to the corporate jet--for free. GE spokesman Bruce Bunch says Welch's role in creating over $150 billion in shareholder value means that it's "in shareowners' interests that his services would be available."
Pay watchers say that the amounts being awarded to departing executives are strictly a measure of what the current market will bear. "The days are gone when the board has the flexibility to get rid of someone without a big financial settlement," says Carol Bowie, editor of Executive Compensation Reports, a Fairfax (Va.)-based newsletter. More than ever, out of sight is hardly out of pocket.