Golden Parachutes

Hey can I ask you a personal question? It won’t go any further than me, I promise. Have you ever been fired from your job? You know what I mean, canned, let go, shown the door, you get my drift. When you were informed your services were no longer required, the odds are you filed for unemployment right? So then you received roughly 60% of your estimated salary while you were employed. The benefits are temporary, varying anywhere from 5-6 months depending on where you live, then you’re on your own again. But what if you are the CEO or COO of a Fortune 500 company like American Express, Hewlett Packard or Lowe’s? Well, then you can expect to receive millions of dollars for being fired. Later the deposed leader will emerge as CEO or COO of another Fortune 500 company, repeating the process yet again. Hey it’s great work if you can find it.

These deals where CEOs receive enormous sums of money when they exit a company are called golden parachutes. “Golden” because of the amount of money they fork in upon their departure and a “parachute” to actually soften their landing after they are deposed of their duties. Decades ago these exit packages involved a cash severance of two or three times salary plus a bonus. However in recent years these exit packages have risen dramatically and literally gone through the roof. These severance packages can be funded in a variety of different ways. Sometimes it’s cash, shares of stock, annuities, securities, options or even pension benefits.

But what’s frustrating is that in many instances these company heads receive this money after the companies they’ve run have posted enormous losses or even filed for bankruptcy. This is what drives the public nuts, fueling the calls for additional regulation and oversight. It’s nothing more than Wall Street greed, plain and simple. Where other than Wall Street can you do a horrific job, be responsible for millions of dollars in losses, get fired and then receive a ridiculously high severance package as you walk out the door?

Take a quick look at the following names.

Carly Fiorina of Hewlett Packard – $45 million,

Stanley O’Neill of Merrill Lynch – $66 million,

Chuck Prince of Citigroup – $16 million and

Countrywide CEO Angelo Mozilla – $110 million dollars.

These are just a handful of the recent recipients of golden parachutes. The amount of money they are paid after leaving their company is simply staggering. Regardless of the reasons for their ousting, the fact of the matter is they are being paid insane amounts of money after they’ve been fired.

However there are those that champion these huge paydays. Supporters of these agreements argue that they provide managers with the incentive to maximize shareholder wealth without worrying about losing their job as a result of a change in control. They add that without these agreements, companies would be unable to attract the best and most innovative minds to run these multi-million dollar corporations. Finally these deals can be used to discourage hostile takeover attempts by corporate raiders, sharks or competitors. Often a “golden handshake” will accompany a golden parachute. This is an unwritten deal where a company promises to pay following the termination or retirement of a leader of a company.

Many of these companies have been embroiled in the subprime mortgage fiasco. Some are facing huge layoffs (Citigroup), need a government bailout (AIG) or are facing bankruptcy (Lehman Brothers.) Often these company heads never admitted any wrongdoing or that there even was a problem until it was to late, as in the case of AIG, which is now receiving $85 billion dollars of aid from the government. After being summoned to Capitol Hill, former AIG CEOs Martin Sullivan and Robert Willumstad told Congress that accounting practices and forces beyond their control led to AIG’s downfall. But just to show that old habits of excess die hard, incredibly enough only one day after receiving the federal bailout money, AIG sent executives on a huge retreat filled with spa treatments, gold outings, buffets and dinners totaling over $400,000. Oh and by the way, if you were wondering Martin Sullivan received a $47 million dollar golden parachute from AIG and Robert Willumstad is slated to receive $7 million dollars for just three months of work at AIG.

Congress, painfully aware of the situation, is prepared to act. As part of the proposed $700 billion dollar bailout, they plan to include legislation to curb these tremendous payouts to these company heads. But there is a small fly in the ointment. Congress (i.e. the government) needs Wall Street’s cooperation in order to accomplish their goal of auctioning off this debt to investors. So Wall Street has a chip and definitely will play it. It goes without saying that Wall Street doesn’t appreciate governmental interference when it comes to the running of their companies. They don’t want to be dictated to or told how much they can pay their leaders. So even with the good intentions of Congress, don’t expect golden parachutes to go the way of the Passenger Pigeon or the Dodo bird. In all honesty, golden parachutes are probably here to stay.