Parting is such sweet sorrow
It was clear Ken Thompson was in trouble, just not how much. Shares of Charlotte-based Wachovia Corp. had plunged, losing more than half their value as its 2006 purchase of mortgage lender Golden West dragged down earnings and the nation’s housing crisis deepened. The company had slashed its dividend 41%. When he relinquished his title as chairman, it was ostensibly to concentrate on his role as CEO to right the company. Yet less than a month later, the board forced him to retire.
Two days later, the local newspaper did the obligatory examination of regulatory filings and concluded that he had walked away with $28 million. Once again, it seemed, a bungling chief executive had stumbled — or been pushed — out of a plummeting plane, pulled the ripcord on his golden parachute and floated into a comfy retirement.
But the stereotype doesn’t quite fit. Most of that money was for producing enormous profits in previous years — more than $6 billion in 2007. Nearly three-quarters of the $28 million was stock he already owned — some of it bought with his money — or had been promised by the board. His retirement package didn’t include a lot of new money, at least not for someone who had been making about $20 million a year in cash, bonus, stock, options and other compensation. Aside from accumulated pension benefits and deferred income, he got 16 months’ salary — $1.45 million — accelerated vesting of stock and options he had been awarded, a company-paid office and assistant for up to three years and up to $50,000 to cover legal fees related to his departure.
Assessing the size of an exit package from company proxies is not an exact science. Often, as in Thompson’s case, what’s reported gets fine-tuned when a CEO leaves. To get an idea of how much CEOs at Tar Heel companies would make if they were terminated without cause — for performance rather than misconduct — Business North Carolina asked the Charlotte office of human-resources consultant Findley Davies Inc. to come up with an estimate for each of the state’s 75 largest public companies. Reporting on termination pay is still new and varies from company to company. Some give only the company’s total cost. Others break down termination pay into tables showing its components. Others give descriptions without dollar amounts, and still others have no plan.
The results represent the value of each CEO’s termination package at the end of the latest fiscal year. While Thompson’s was generous, about $19 million, four other CEOs have bigger ones. His cash severance doesn’t even rank in the top 30. It’s just a fraction of the $15 million that would go to John Allison of Winston-Salem-based BB&T Corp.
There’s no need to weep for Thompson, who is 57. After 32 years with the bank, the last eight as its chief executive, he can well afford to spend the rest of his life merrily whacking little white balls toward manicured greens if he so chooses. Yet given the size of the business he ran — the state’s second-largest public company — and the size of some other CEO termination packages, he doesn’t deserve an extra helping of derision. “It didn’t seem like he got anything particularly excessive, especially because he did a fairly good job before this mortgage mess,” says Ed Van Wesep, who researches severance agreements as an assistant professor of finance at UNC Chapel Hill.
Thompson’s unvested stock was worth $7.2 million the day he left, and the immediate vesting he received is a benefit. But, as with many ousted CEOs, selling now with the stock so low might not be in his best interest. The true value of his package won’t be known until he sells all his stock and exercises the last of his options. They’re worthless now, but some don’t expire for 10 years. If the stock price rises enough before then, they could still provide him with millions of dollars.
Perhaps a bigger question than how much a CEO gets for leaving is why someone who is paid millions a year needs a termination package. Why does Christopher Kearney of SPX Corp., the Charlotte-based industrial equipment maker, need an exit package worth nearly $30 million? Ditto Ken Lewis at Charlotte-based Bank of America. And what effect, if any, does such a package have on job performance?
Experts say compensation for doing their job matters more to CEOs than how much they’ll get for losing it. But to attract top-notch candidates, boards have to underpin pay packages with a safety net — especially if the object of their desire already has one. A CEO gig at a large public company is the top of the corporate food chain — the best chance most executives have to maximize their earning power — but the job often doesn’t last very long. The average tenure is less than 10 years, according to survey data compiled by Challenger, Gray & Christmas, a Chicago-based consulting firm. “Years ago, a CEO was normally groomed inside the company, stayed on for 10 or 15 years and retired. That’s not the case today,” says Bill Holland, chairman of Charlotte-based EnPro Industries and former chief executive of United Dominion Industries, now part of SPX.
A big termination package doesn’t influence day-to-day actions, he says, but it gives a CEO the spine to make tough decisions and pursue his strategy with less fear of being fired. “It frees up that individual from being too intimidated by the circumstances or by his directors.” It also can be a boon to the board. No matter how happy and hopeful everyone might be when a CEO is hired, the job is demanding, and many things are beyond an executive’s control. It’s not a bad idea to prepare for when working relationships go bad and develop an exit strategy — something that will ease the embarrassment of separation and avoid legal hassles. But it’s not always necessary to have one before you need it, and some say that experienced CEOs such as Thompson, Lewis and Allison need one far less than a new hire.
When Lewis took control of BofA in 2001, it was the nation’s second-largest bank, the same as now. Already paid handsomely as chief operating officer, his promotion made him the best-paid CEO of a Tar Heel public company. In the first six years of his tenure, BofA profits shot steadily upward, peaking at $21 billion in 2006. Last year, it, too, was caught up in the financial industry’s woes, and net income fell. So did Lewis’ pay, though by a smaller percentage. Should the decline continue and Lewis get the boot, he can console himself with the immediate vesting of stock worth $29.7 million at the end of the last fiscal year.
Kearney of SPX, though he gets paid less than Lewis, would get more than the BofA chief if he were fired. Though one might quibble with the amount, a case could be made that Kearney, who became CEO in December 2004, needs the security of a severance package, while a longer-serving CEO such as Lewis does not. Any new CEO takes a gamble that he might not be able to handle the job or might not see eye-to-eye with the board once he has a chance to evaluate the company and develop his own strategy. “Generally, you don’t want individuals to bear risks,” Van Wesep says. “You’d rather have the shareholders do it because they can diversify that risk with other holdings in other companies.”
But over time, the CEO’s risk factor lessens, and the wealth he accumulates through the company increases. As he remakes the company, promoting and hiring employees he likes and pushing out or marginalizing those he doesn’t, his need for a safety net should decrease. “Now he’s been there, he’s got his team in, the board knows what they have, and hopefully, with performance, they have made the money,” says Hank Federal, principal and market leader for Findley Davies’ Southeast practice.
He argues for a severance package that shrinks after three years and disappears after seven. “Where you have long-tenured executives whose wealth accumulation provided by the company is already at levels most people in society would say are fairly nice, then a board needs to say, ‘Hey, we don’t need to do that anymore. You don’t need to have that except upon change in control, because then it’s like you’re a new CEO again.’”
Entrepreneurs who take their company public and remain CEO often have hefty termination packages. “If I’m a founder and I take my company public and in doing so I lose majority control of the voting power, then I should be treated as a new CEO,” Federal says. But once in place, those packages often don’t go away. Stanley Tanger, for example, started the predecessor of Tanger Factory Outlet Centers Inc. in 1981. It went public in 1993. According to the Greensboro company’s latest proxy statement, he owns less than 20% of the shares. His termination package — $18.7 million — ranks sixth among CEOs of the 75 largest public companies even though Tanger, now in his mid-80s, wouldn’t seem to need that kind of security blanket.
Founders who keep control of their companies after they go public have less to worry about. Robert Ingle, founder and CEO of Asheville-based Ingles Markets Inc., controls more than 85% of the shares. He has no termination agreement. “He doesn’t need one,” Federal says.
Just because a CEO doesn’t have an exit package doesn’t mean he won’t get anything if fired. And just because something is spelled out in a proxy or employment agreement doesn’t mean there won’t be negotiations if a CEO is fired or forced out. Which path a board takes depends on circumstances and director preference. Federal, for one, says he would do all the negotiating at the end if he were on a board overseeing a longtime CEO. Holland would rather have a package in place, then refine it as needed.
Beyond its usefulness as a recruiting tool and salve for new CEOs, a severance package helps preserve the dignity of the company and the CEO, should his tenure end on a sour note, Federal says. “Every one of these severances says they have to sign a nondisclosure/noncompete contract. So if a person wants the money, they can’t trash the company.” It works at least some of the time. Asked to comment about his departure, Thompson politely declined.