Soft Landings for CEOs

Some shareholders may object, but heads of most major financial services firms will have very secure futures even if they're forced out

It's anybody's guess which chief executive of a major financial services firm will be the next to fall victim to the subprime mortgage mess—or when. But should the fallout spread, one thing is certain: Many of the executives currently running financial services companies will leave with significantly less compensation than they thought. Most, that is, but not Richard Fuld Jr. The CEO of Lehman Brothers has nothing to worry about—his exit package is valued at $299 million, putting him close to the record for any such package.

By parsing proxy statements and crunching numbers, analysts can figure out roughly how much the CEOs of major financial services firms might take on their way out. Paul Hodgson, a senior research associate at The Corporate Library, did just that for the heads of 10 financial services firms, at's request.

Some of the numbers uncovered by The Corporate Library are staggering, but a scratch below the surface shows that what drives severance packages can vary widely from company to company. At companies like Bank of America (BAC) or Countrywide Financial (CFC), the bulk of a CEO's exit package is tied up in retirement benefits.

Determing Their Own Fate

At companies such as Lehman Brothers (LEH), Morgan Stanley (MS), JPMorgan Chase (JPM), and Goldman Sachs (GS), most of a CEO's expected termination benefits come in the form of restricted stock. CEOs whose fortunes are so closely linked to the firm's stock price ultimately determine their own fate. "Despite the large number of zeros, even within this very high-paying industry, there is substantial pay for performance," says Ira Kay, global practice director for compensation consulting for Watson Wyatt.

Case in point: Stanley O'Neal, who became the first chief executive who headed for the door after Merrill Lynch (MER) posted a $2.24 billion third-quarter loss related to mortgage troubles. While the massive size of O'Neal's exit package—the fifth largest on record at $161 million—raised eyebrows, pay consultants note that O'Neal pocketed only what was owed him, including $131.4 million in stock and stock options, as well as nearly $25 million in pension benefits.

However, he received no bonus. "O'Neal was pushed out with not so much as a golden handshake," says Frank Glassner, president of Compensation Design Group, an executive consulting firm in San Francisco. Glassner and other compensation experts say Merrill Lynch's decision may set a precedent for other boards to take performance-based pay more seriously.

Tenure Has Its Advantages

But no one is claiming a victory yet. Citigroup (C) chief Charles Prince received a $12.6 million bonus, despite lackluster performance during his tenure. With a total walk-away package of more than $40 million, Prince ranks ahead of four other CEOs on The Corporate Library's list.

At the top of pack—and far ahead of his colleagues in financial services—is Lehman's Fuld, who could be entitled to an exit package worth nearly $299 million. The bulk of it is $276 million in restricted stock, some of which was awarded in the 1990s. Fuld's expected payout outshines everyone else in the industry because he has worked at the investment bank since 1969 and has run it since 1993.

Even so, the package has raised some eyebrows.

"[$299 million] is a lot of money—even for Lehman Brothers," Hodgson says. Lehman managed to avoid much of the subprime mess, so no one thinks Fuld, 61, is going anywhere anytime soon. But when he eventually leaves the firm, Fuld will not receive what's owed him in a lump sum—it will be paid out over a 10-year period. If Lehman Brothers' stock perks back up to year-ago levels, Fuld could handily beat the record $351 million exit package set by former ExxonMobil (XOM) chief Lee Raymond, who retired in 2006.

Behind the Numbers

Another other big potential payout could go to Kenneth D. Lewis, Bank of America's chairman and CEO, who has run the bank since April, 2001. According to The Corporate Library's data, Lewis's exit package is worth more than $120 million, although it's down from an estimated value of $136 million at end of 2006. "These amounts reflect what Mr. Lewis earned in prior years," according to a Bank of America spokesperson. Bank of America said on Nov. 13 it will take a pretax write-down of about $3 billion in the fourth quarter to reflect a drop in value of securities related to mortgages. The company's stock is down about 14% over the past year.

To determine the value of each exit package, Hodgson looked at the value of disclosed pension benefits and non-qualified deferred compensation plans as well as unvested restricted stock and options. The estimates use stock prices based on an average of the high and low stock price on Nov. 6. Hodgson also added cash severance payments for those who had them. (Severance benefits are awarded if an executive is fired without cause or claims a breach of contract.)

New disclosure rules came into effect in June, 2006, for companies with fiscal years that end after December 15. Those companies are required to disclose the value of termination benefits at yearend. Several companies on the list, including Goldman Sachs, Morgan Stanley, and Bear Stearns (BSC), have a fiscal year ending in November, which means they didn't fall under those new disclosure laws at the time of their last proxy. That makes it trickier to piece together exit packages for executives at these firms.

Most executives at companies ensnared in the subprime mess have seen the value of their packages tank. A plummeting stock price has sliced about a third off the potential exit package of Bear Stearns CEO James E. Cayne, now valued at roughly $31.2 million. At Wachovia (WB), G. Kenneth Thompson has seen more than $17 million, or 38%, of his estimated payout disappear.

Some Shareholders Are Fuming

Not so if you're Angelo R. Mozilo, chairman of Countrywide Financial (CFC). Although Countrywide is at the epicenter of the subprime meltdown, Mozila has seen just minimal damage to his estimated payout. Should Mozilo be forced out, his benefits are worth more than $73.5 million, including a cash severance payment of $29 million and pension benefits of almost $23.8 million, down from $81 million last year.

With Countrywide's stock down more than 68% this year, shareholders are fuming. "Does someone who owns that much of a company outright need to have severance and pension benefits?" asks Richard Ferlauto, the director of pension and benefits policy for American Federation of State, County, and Municipal Employees.

Countrywide, along with Bear Stearns and Freddie Mac didn't respond to phone calls for comment. Morgan Stanley, Lehman Brothers, Fannie Mae, JP Morgan Chase, Freddie Mac, Bear Stearns, and Wachovia declined to comment. Goldman Sachs noted that Blankfein "…would be eligible for his outstanding unvested stock, but that's it," if terminated without cause.

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