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New York Times, January 7, 2007 column


The New York Times

January 7, 2007


Gretchen Morgenson

More $200 Million Parachutes? Don’t Be Shocked

IT has been a bit bewildering to watch two failed chief executives in the last two weeks or so waltz away from their companies toting severance packages worth more than $200 million each. But pay experts say shareholders had better get ready for more of the same.

Last week, Robert L. Nardelli hightailed it out of Home Depot with $210 million, fast on the heels of Hank McKinnell, whose farewell package of a similar amount from Pfizer was disclosed Dec. 21. Both were paid profusely for failure, thanks to contracts struck years ago by the companies’ directors.

Keep in mind that both packages supplemented pay that these executives received during their tenures. Mr. Nardelli’s $210 million, for example, came on top of the $63.5 million he made running Home Depot for six years.

That exit numbers like these have shocked many shareholders proves how much inadequate disclosure has kept executive pay hidden from view. But with new rules from the Securities and Exchange Commission on improved pay disclosures, more of these “holy cow” moments will be coming soon to a proxy near you.

Under the new rules, companies will have to disclose potential payments to executives in the case of a termination or a change in control at the company, wrought perhaps by a merger. Unfortunately, the S.E.C. did not require that these payments be made in tabular form and totaled, which would have made it simple for time-pressed investors.

For the most part, however, the figures will be there in black and white.

Are we likely to see any $200 million numbers? Yes, said Mike Sorensen, a principal at Exequity, a law firm in Libertyville, Ill., that does compensation work. He expects such largess to show up at roughly 10 of the nation’s 100 largest companies.

“There are a lot of big numbers out there for many companies,” Mr. Sorensen said. “Directors right now are looking at these things and saying, ‘Wow, these are really embarrassing; we have to revisit this.’ But that won’t happen overnight.”

A CHIEF executive with 10 years of service at a top-100 company might typically be in line to receive $50 million to $60 million in pension obligations, deferred compensation and cash severance, Mr. Sorensen estimated.

That doesn’t include the value of executives’ share grants, however, which is a wild card. Executives who have received oodles of options over the years and never sold a share will have a much larger total value, for example, than executives who have exercised options regularly and sold shares.

But for all the work that went into the new disclosure requirements, they still leave shareholders in the dark in several crucial areas, said Brian Foley, an independent compensation consultant in White Plains. As a result, the total pay picture will still elude us.

“Things are not going to quite make it to the surface the way they should have,” Mr. Foley said. “The summary compensation is not even close to one-stop shopping, which is what one S.E.C. commissioner said was the goal.”

For example, Mr. Foley said the new rules should have required a cumulative tally of exercised stock options, restricted stock awards that could be cashed in and long-term incentive payouts. That way, shareholders could see how much wealth executives had already banked.

Another missing figure: dividends paid on restricted stock and unvested stock awards.

Neither do the rules require disclosure of how much the company has contributed to an executive’s defined-contribution plan, such as a 401(k). For executives who have been at a company for a long time, this can be a big number, Mr. Foley said.

Also on his wish list is full disclosure of the impact of financial restatements on executive pay dispensed in previous years, especially for executives who were directly involved in activities that led to restatements. It is not as if restatements are rare: during the first nine months of 2006, according to the research firm Glass Lewis & Company, 967 companies restated their financial results, 6.5 percent more than did so in the same period the previous year. These restatements almost certainly mean that some executives were paid for results they did not actually achieve.

But the biggest hole in the new rules, Mr. Foley said, is that they do not require the disclosure of compensation or benefits that have been paid between the end of the year covered by the proxy statement and the date of its filing, which could span several months. Often, he said, companies make large grants in the early months of their fiscal years, but shareholders don’t find out about them until more than a year later, unless they pore over insider-trading forms.

“What is the excuse for not having an update section that picks up the big-ticket items like employment agreements and equity awards that went to the big guys?” Mr. Foley asked. “The proxy at the time of mailing ought to be more current.”

Last week’s outcry over Mr. Nardelli’s exit pay certainly means that boards will be looking at their companies’ tallies, even if they are preliminary. When they do, directors should quickly correct past compensation mistakes, said Jesse M. Brill, publisher of, a Web site specializing in pay issues.

Two practices are eroding public trust in the system, he said. The first is the granting of stock to executives who already own so many shares that additional awards cannot possibly motivate them further. The second is to continue giving retirement, severance and change-in-control pay to people who have already accumulated “several lifetimes of wealth.”

“Many boards will need to implement a coordinated offset,” Mr. Brill wrote, “so that when accumulated gains from equity and long-term incentives reach an agreed-upon amount, post-employment provisions become unnecessary and are canceled out.”

This is surely going to be a neck-wrenching change for executives and directors who seem unable to comprehend the concept that enough is enough. Breaking executives of their more-more-more habits won’t be easy, of course. Thank Mr. Nardelli for getting directors’ attention, at least.

Shareholders can do their part by withholding their support for any director who doesn’t try to cut back on excess pay. That could make the coming proxy season more entertaining than ever.

Copyright 2007 The New York Times Company




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