Inflated Golden Parachutes Can Impact Merger Prices Significantly

Tuesday, May 9, 2006

Gordon Platt, Global Finance, http://

Abstracted from: Going For Gold
By:
Global Finance - March 2006, Pgs. 18-21

Bigger and bigger payouts.
Following Procter & Gamble's successful acquisition of Gillette, the latter’s CEO, James Kilts, received a golden parachute worth $188 million, including $165 million in stock options and severance pay. Originally introduced into the compensation system as a way to thwart takeovers in the 1980s, Gordon Platt explains, golden parachutes and golden handshakes are getting bigger and more common in corporate America. Bruce Hammonds, the former CEO of MBNA, was awarded $100 million when his company merged with Bank of America in January 2006. The $139.5 million lump-sum payout for the former head of the New York Stock Exchange, Richard Grasso, raised eyebrows in 2003. These change-of-control provisions are standard in most executive contracts. Corporate boards justify the enormous payouts on the grounds that they protect the shareholders by retaining top talent. Quite the opposite, say compensation consultants. These outsized pay packages, which have no link to executive performance, cost the shareholders significantly in both outright dollars and dilution of the share price. They can also influence the price of a deal and determine its successful outcome. These same consultants say that the only way to avoid the effects of golden parachutes is to stay away from the stock.

Paying for performance.
Severance provisions generally include payouts of one-and-a-half to two times salary and bonus; golden parachutes run to three times salary and bonus. Deferred compensation, normally a part of long-term incentive pay, is consistent with the trend linking pay with performance, but it has been hijacked by inflated severance pay. CEOs in America receive the world's largest compensation packages, although other countries are catching up and the gap is narrowing. Performance-based compensation ranges from 14% in India to 62% in the United States, the author reports. In the Far East, companies pay larger bonuses (10% to 15% of salary) than those in America and Europe (5% to 10% of salary). CEO turnover is higher in the United States than in other countries, with an average tenure of three years. Adding to the pressure on CEO compensation is the 38.4% increase in global mergers and acquisitions in 2005, the most active M&A year since 2000. During the intervening five years, when activity was much slower, golden parachutes did not go away. They were written into employment agreements but not publicized until after a merger was completed.

The winds of change.
The supersized golden parachutes of the past may not be a sign of the future. Proposed SEC rules on executive compensation require companies to calculate and publish in the proxy statement the value of parachute awards, long before a merger occurs. The rules are designed to make board members, especially those on the compensation committee, more aware of how large compensation packages are becoming. Institutional investors, which have long railed against outsize pay packages, welcome the change. In a recent survey of 88 major institutional investors cited by the author, 75% replied that compensation for CEOs was too high. They also agreed that golden parachutes do not serve any useful purpose.

Abstracted from Global Finance
published by Global Finance Media
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