When Bosses Get Rich From Selling The Company

Golden parachutes are rewarding dealmaking CEOs

When a company announces big merger plans, rank and file employees often suffer a mass anxiety attack: What plants will close? Which departments will shrink? Who will be laid off? In the executive suite, however, the mood is more upbeat. As this season's proxies show, when companies merge or sell out, chief executives get mindblowing pay deals whether they stay on or ride off into the sunset--regardless of past performance.

The payouts are so big, in fact, that some observers are raising questions about CEO motives. Rich exit packages--so-called golden parachutes--"were designed to relieve executives from having to worry about what could happen to them, so they could evaluate deals effectively," says Carol Bowie, research director of Executive Compensation Advisory Services, a consultancy in Springfield, Va. "We've now come 180 degrees, to the point that the money is so big that it must be difficult, if not impossible, not to consider one's own situation."

Charges of conflicts of interest are already surfacing. As part of its takeover defense, Computer Sciences Corp. filed suit against Computer Associates International Inc., alleging that CA's CEO, Charles B. Wang, tried to win CSC CEO Van B. Honeycutt's support for a deal with a $35 million payout and an employment contract worth $17.5 million. CA denies the allegations.

NO PERFORMANCE ANXIETY. Even without such potential conflicts, the severance packages are eye-popping. Some $20 million in cash, stock, and various perks went to ITT Corp. CEO Rand V. Araskog when ITT was acquired by Starwood Hotels & Resorts. Although Araskog has left the company, in January he received an option grant of 162,500 shares of Starwood in exchange for help during the transition. The deal also commits ITT to paying the "gross-up" taxes due on Araskog's cash severance payments. That could cost an additional $22.5 million, says Donald Fisher, principal at Pasadena (Calif.)-based Compensation Resource Group Inc. And the package is unrelated to ITT's performance: Before its takeover battles began, ITT's stock had seriously underperformed the market.

Another sweet sendoff goes to Kent Kresa, CEO of Northrop Grumman Corp., who will collect a cash payment of $7.8 million and see his stock rights and options worth $16.1 million vest should Northrop's merger with Lockheed Martin Corp. go through.

Former Tandem Computers Inc. CEO Roel Pieper was another winner: After selling out to Compaq Computer Corp. last year, Pieper walked away with $6 million in cash, along with 650,000 new Compaq options and the conversion of Tandem options into Compaq ones. Tandem's earnings and stock price had languished for years before the deal.

You don't have to leave to cash in, either. Sometimes CEOs who stay on get special bonuses as well. When Charles E. Rice, CEO of Barnett Banks Inc., sold out to NationsBank Corp. last year and agreed to become nonexecutive chairman, he received 250,000 NationsBank shares and options for 400,000 more. The proxy stipulates that his annual salary and bonus must be at least $3.5 million--and never less than that of NationsBank CEO Hugh L. McColl Jr. "That would appear to be an ego clause," says Charles M. Elson, a pay expert and professor at Stetson University College of Law. In 1996, Rice's salary and bonus totaled $2.5 million.

RETAINER FEES. Then there's Bert C. Roberts Jr., chairman of MCI Communications Corp., which is being acquired by WorldCom Inc. If the deal goes through, Roberts will become chairman, and he and other senior execs will split a "retention-bonus pool" of $170 million. Roberts' share: $10.5 million. The move wasn't WorldCom CEO Bernard J. Ebbers' idea. MCI had negotiated similar terms in its failed merger with British Telecommunications PLC and extended the terms with WorldCom. "Basically, we walked into the BT-MCI agreement," says a WorldCom spokeswoman.

Another growing trend is to guarantee a departing exec a fat consulting contract. Northrop Grumman's Kresa, for example, would garner $1.4 million in his first year as a consultant. IBM's latest proxy provides CEO Louis V. Gerstner Jr. a 10-year consulting contract upon retirement. He will be paid at the daily rate of his final salary.

But ex-execs don't even have to come back if trouble hits. After agreeing to merge Union Pacific Corp. with Southern Pacific Rail Corp. last year, then-CEO Drew Lewis got a $4 million bonus along with a five-year, $3.75 million consulting deal. The merger has been a disaster, snarling rail traffic across much of the country. So is Lewis now helping to get UP out of this mess? UP spokesman Gary F. Schuster says he has been working on an "as needed" basis. "It doesn't matter if he works at all or a lot," says Schuster. "That's the deal the board cut with him."

With stocks in the Standard & Poor's 500-stock index up 12% this year, there is little outcry over dealmakers' pay. That may change as pay-related proposals come up in annual meetings, says Ann Yerger, director of research at the Council of Institutional Investors. "Pay issues are probably the No.1 concern for our activist members," she says. But by annual meeting season, many deal-related bonuses will be in the bank.

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