Why Fired CEOs Go Straight to the Bank

Jumbo severance packages for top executives are growing | Deals so lucrative, “you don’t really care if you’re fired or not”

Jeff Green


Corporate governance advocates and shareholder activists have long complained that chief executive officer pay, which has jumped by a third since 2007, is sometimes way out of line with a top executive’s on-the-job performance. Severance packages for executives fired by their boards are often far bigger than those corner-office salaries. At least a dozen executives of companies in the Standard & Poor’s 500-stock index stand to receive more than $100 million if they’re dismissed, according to a Bloomberg review of proxy data.

The potential payouts show that golden parachutes live on — even after the uproar over Jack Welch’s $417 million farewell kiss from General Electric more than a decade ago. At the top of the list compiled by Bloomberg are three executives who each would receive almost a quarter of a billion dollars or more if they were sent packing: McKesson CEO John Hammergren, eligible for $303.4 million; CBS CEO Les Moonves, with $251.4 million; and Discovery Communications’ David Zaslav, with $224.7 million.

“If you have a safety net of this type of gargantuan size, it starts to undermine the CEO’s desire to build long-term value for shareholders,” says Paul Hodgson, a director at corporate governance researcher BHJ Partners. “You don’t really care if you’re fired or not.”

Since 2007, Securities and Exchange Commission rules have required companies to quantify pay agreements with top executives. Before, details of exit packages became public only after the person left (or, in Welch’s retirement case, during divorce proceedings). The trend toward large severance payments took root in the 1980s, when many CEOs lost their jobs in takeovers, says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware in Newark.

“Executives got insecure when they realized that they could just get fired and insisted on a contract, and with that came severance,” Elson says.

“The problem is with the contracts. They [boards] make these deals when they are trying to woo an executive, not thinking of what the payout will be.”

Executives today get an increasing part of their severance payout in stock, and severance contracts cost more after shares surged amid the economic recovery, Elson says. Also, boards aren’t tough enough during pay negotiations, notes Boston University School of Management professor James Post. “Compensation committees,” he writes in an e-mail, “are not in the business of saying ‘no.’ ”

(While most CEOs are unlikely to be fired, most on our list stand to get packages worth more than $100 million if they lose their job in a merger. And they would get large payouts if they retire.)

Entertainment executives make up half of Bloomberg’s listing of managers who would receive severance payments of at least $100 million if they were ousted. Besides Moonves and Zaslav, they include Philippe Dauman and Tom Dooley at Paramount Pictures’ parent company, Viacom; Wynn Resorts chief Stephen Wynn; and Walt Disney’s Robert Iger. “To most people, this kind of money to get fired is inconceivable,” says Robert Thompson, a media professor at Syracuse University. “But with the budgets of movies and the pay for movie stars at astronomical, almost unthinkable levels, it creates a bar against which the executives expect to be measured.”

Viacom gave about $100 million to departing CEO Tom Freston in 2006 after nine months on the job. The company has potential severance liabilities of $187.5 million for Dauman, Freston’s successor, and $150.1 million for Dooley, its chief operating officer. Yum! Brands CEO David Novak is eligible for $169.8 million, and Wynn would pocket $168.3 million. Representatives of CBS, Viacom, Discovery, Wynn Resorts, and Yum! declined to comment.

Often, the largest portion of severance comes from accelerated payment of unvested stock options and other stock units that would otherwise not be eligible for a payout. In Hammergren’s case at McKesson, accelerated options and stock grants amount to $105 million, about a third of the total. A company spokesman didn’t respond to e-mail or phone requests for comment.

Such speeded-up payments are increasingly the target of investor action. The AFL-CIO, which represents 12 million union workers and sponsors pension plans holding $480 billion in assets, is pressuring companies to limit awards to the value of stock and options that were already vested, says Brandon Rees, acting director of the AFL-CIO Office of Investment. Pressure has worked in some cases. Simon Property Group amended the contract of CEO David Simon, cutting the value of his severance to $86 million from about $165 million if he’s fired before 2015 and the full value of his long-term incentive plan is paid, according to its proxy. Shareholders, who rejected Simon Property’s initial pay package with 71 percent of votes cast in 2012, approved the revised agreement this year with 55 percent in favor, according to executive compensation tracker Equilar. Hugh Burns, a Simon Property spokesman, said the company had no comment.

At Freeport-McMoRan Copper & Gold, CEO Richard Adkerson’s and Chairman James Moffett’s severance payments triggered by termination without cause would be $63.8 million and $64.3 million, respectively, spokesman Eric Kinneberg said in an e-mail. Including accelerated vested benefits, the payouts would total $113 million and $116.4 million. Ralph Lauren, the namesake company’s founder, is eligible for about $148.6 million if fired, according to the company’s proxy. Part of his estimated payout includes options that still vest after he leaves, but aren’t accelerated. Similarly, $45 million of Iger’s $104.8 million severance are options that would vest after his exit.

The bottom line Some CEOs profit handsomely when they’re fired. Three corporate chiefs are due severance pay of at least $224 million.


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