Here’s a quick test: What do Jeff Smisek, Bryan Stockton and Stephen Bennett have in common? Aside from being CEOs of big U.S. companies, each was fired but left his corner office with a pretty hefty severance package. Smisek departed United Airlines last month with an estimated $28.6 million. Stocks include salary, along with things like bonuses or performance pay and accelerated vesting of stock awards.
Such outsized departure checks, sometimes dubbed “golden handshakes” or “golden parachutes,” usually make headlines. And while they may not be particularly costly to a company, the payouts can rub rank-and-file workers the wrong way, according to a quartet of professors at the University of Pennsylvania’s Wharton School.
“When a package looks manifestly unfair, it sends a message to the company that the board is not really trying to get great performance for great pay,” says management professor Michael Useem.
Adds accounting professor Wayne Guay, “[I]t just smacks of a sense of unfairness.”
The academics offered a look at the payout phenomenon and reaction to it in an article published in 2012 in Wharton’s online business-analysis journal. ton, forced out at toymaker Mattel earlier in the year, pocketed $9.7 million. Bennett exited antivirus software firm Symantec last year with $24.3 million. (The numbers
They trace the payouts to hiring contracts that give severance its parachute connotation: a safe landing for CEOs willing to take risks to improve company performance. “Taking a risk might be right for shareholders, but the CEO might not do it if it could cost him his job,” explains finance professor Luke Taylor.
The four say laws enacted since the pay excesses of the early 2000s (Sarbanes-Oxley) and the recession of 2009 (Dodd-Frank) have curbed the once-chummy atmosphere of boardrooms and have given new voice to shareholders.
But, offers Useem, “I would not hold your breath waiting to see a change in compensation for exit packages.”
Staples, the office products retailer, announced a step in that direction this month by saying it now will cap severance for senior executives at 2.99 times base salary plus bonus, unless shareholders approve more.
The idea was put before Staples’ annual meeting in June by the New York Common Retirement Fund, which owns 1.7 million shares of company stock, and IBEW’s Pension Benefit Fund, which owns 9,700 shares. Staples’ board initially did not support it, but 69 percent of voting shareholders did.
Prior to the announced change, the severance package for Staples’ current CEO ranged from $6 million to $24 million, depending on the particular departure trigger, and included two years of salary and bonuses.
Perusing those numbers in Staples’ regulatory filings ought to give pause: Does capping severance at nearly three times the CEO’s annual salary (presently $1.25 million) plus the target annual cash incentive (which also can be large) really make that much difference?
Can’t boards do better?
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