Contra Costa Times - May 29, 2005
Top staff's severance packages are on rise
Deals include millions in cash as well as stock options, office space and equipment, sabbaticals to pad already hefty offers
By George Avalos
More than a few Bay Area executives who fell from grace during 2004 cushioned their descent with a generous pile of greenbacks.
Lousy company performance or disagreements with their boards of directors were no obstacle to being able to haul away plenty of dough, in some cases millions of dollars.
In addition to severance packages, many former executives were handed huge cash payments and millions of stock options.
But the perks didn't stop there. Career, legal and financial counseling, top-level secretarial assistance, paid office space, a paid two-month sabbatical, home computer equipment and home security services are among the goodies that some top executives in the Bay Area got upon their departures, according to filings with the Securities and Exchange Commission.
"The executives make sure they are taken care of," said Graef "Bud" Crystal, a Nevada-based compensation consultant who is critical of the generous pay and severance packages that become the basis of big payments even after a company terminates a boss. "Once you get to a certain level, you can fail, but not fail in the sense that a normal person fails."
Yet, some consultants argue that companies have good reasons not only to pay an executive large amounts of cash and stock, but also to agree to a lucrative severance package when they hire the firm's new leader.
"The executive is looking for protection beyond their pay," said Brandon Cherry, a principal executive with San Francisco-based Presidio Pay Advisors. "These pay and severance agreements are a way to provide peace of mind for an executive. Granted, that's a hard thing to hear for a rank-and-file employee."
One academic, Benjamin Hermalin, a professor with the economic analysis and policy group at UC Berkeley's Haas School of Business, points out that executives have virtually no job security.
"If you take on the job of being a CEO, you are taking on a tremendous amount of risk," Hermalin said. "If things go badly, you're going to get fired."
But James Hawley, a director with the Moraga-based Center for Fiduciary Responsibility at St. Mary's College, said he believes companies often do not want to be seen hiring anyone other than the best talent.
"It's Lake Wobegon, where all the kids are above average," Hawley said. "No one wants to be seen as offering average pay."
Andrew Williams, a director at the Fiduciary Responsibility Center, sees a lot of parallels between the corporate and the sports world.
"Executives in a sense are being compensated like professional athletes," Williams said. "Companies want a Barry Bonds, a star athlete who will carry their team. So the CEO coming in tells the board he is the company's savior, here are my demands and take them or leave them."
The severance packages that become public are, in some cases, just the start of the post-firing pay for Bay Area captains of industry. As part of the negotiated packages when an executive departs, the company often agrees to let the official sell some or all of his stock options at an accelerated pace. And that can mean millions more in eventual pay.
Ironically, a firm's improved performance after an executive leaves can enrich the official beyond the basic severance package.
"If the new CEO does what they could not do, then the former CEO gets the windfall," Broman said.
At the time PeopleSoft Inc. fired top boss Craig Conway, the company officially estimated his severance package was worth $18 million. But Conway also had at the end of 2003 4.9 million shares of unexercised options.
When Oracle Corp. consumed PeopleSoft, the company's stock was worth $26.50, a price far higher than its shares were when Conway left.
As a result, Lafayette-based Syzygy Consulting Group, which advises firms on compensation, figured Conway's take could top $60 million, including severance package, cash, restricted stock payments and the millions of shares of stock options, depending on when Conway exercises the options.
"Conway made out like a bandit," said David Broman, Syzygy's chief executive and co-founder. "Conway was able to double his severance pay by just sitting quietly at home." The Times left a message at Conway's home, but he did not respond to a request for a comment.
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| Lawrie | Pottruck | Conway | Fiorina |
Conway is hardly alone. Other bosses who were forced out in 2004 or earlier this year could certainly soothe any disappointment with millions in cash and other goodies.
• David Pottruck, ousted in July 2004 as CEO of Charles Schwab & Co., got a lump-sum payment of $6.2 million and a monthly payment through January 2007 that will total $3.8 million over the period. He also gets top-level secretarial assistance worth up to $142,700 and office space worth $155,000. Pottruck also was able to take an eight-week paid sabbatical after being terminated. He also stood to realize a potential profit of $18.3 million from his unexercised stock options. And Pottruck netted a profit from stock sales of nearly $27 million during the final year of his tenure.
• J. Michael Lawrie was forced out in April as CEO of Siebel Systems Inc. after about a year at the helm in the wake of the company's dismal performance. Lawrie's pink slip was accompanied by a $4.5 million cash payment equal to two years of base salary and bonus, along with accelerated vesting of 800,000 of the 2 million in stock options he had. The company figured his options were worth about $7.1 million if the company's stock rises 5 percent a year. Lawrie also received $3.6 million worth of so-called restricted stock as part of his total pay. Restricted stock refers to a grant from a company of shares that have limits attached to them, such as a requirement that the executive not sell the shares for a certain period of time.
• Carleton Fiorina, former CEO of Hewlett-Packard Co., won a severance package worth $21.4 million. Fiorina also received $50,000 for career counseling, financial and legal services. The company also allowed her to retain her home computer equipment.
Some executives, though, dismiss claims that generous settlements suggest an executive is overpaid. Pantelis Alexopoulos recalls a lot of hard work during his tenure at Maxtor Corp. and believes his final-year pay package of $2.6 million was well justified.
"If somebody works a year at a company and gets a big package, I have a problem with that," Alexopoulos said. "But if you pay your dues and do a good job, that's justified."
Alexopoulos was chief technical officer at Maxtor for nine years.
"This was a tremendously demanding job, and I was working weekends and nights," Alexopoulos said.
Raymond Smets was president of the Sniffer Technologies unit of McAfee Corp. and was entrusted with the task of preparing Sniffer for sale. He also knew prior to taking the assignment that he likely would be out of a job once he succeeded in his task.
"I worked seven days a week to do whatever it took to get the company ready for acquisition," Smets said. "I knew I was working my way out of a job. But I wanted to maximize shareholder value. And I was nicely compensated for that." Smets' final-year pay package was $3.8 million, including severance and other payments of $2.7 million.
If some of the executive parting gifts seem unlovely to the casual observer, don't expect this practice to stop. And that's even with all of the scrutiny of corporate America that arose from the company scandals over the past decade. Crystal believes that companies still overpay executives, especially in tough times.
"In the good times, pay soars to the heavens," Crystal said. "In bad times, you would expect pay to plunge like a refrigerator thrown out of an airplane. Instead, it floats like a feather, falling only slowly."
Broman says the responsibility for the generous pay and departure packages falls firmly on the shoulders of the board members who hire a CEO.
"The board members are unable to get tough with their own," Broman said. "If you are a rank-and-file worker, or a mid-level manager, and you demand two years' pay as your severance, and all of your stock options, the company would laugh and walk you right out the door."
George Avalos covers the economy, financial markets and banks. Reach him at 925-977-8477 or gavalos@cctimes.com.
