US: Companies Cut Holes in CEOs' Golden Parachutes

New Disclosure Rules Prompt More Criticism of Guaranteed Payouts
Publisher Name: 
Wall Street Journal

Top executives at Double Eagle Petroleum
Co. signed employment agreements this month that curtailed a
time-honored executive perquisite: the executives don't get severance
in cases of "poor performance."

Sigmund Balaban, a Double Eagle director, says the
board wanted to make sure departing executives deserve the money they
walk away with. He jokes that the new severance plan is a "golden
parachute with a hole in it."

Double Eagle's contracts show one company's attempt to
solve a persistent compensation problem: rich severance packages for
failed executives.

The issue flared anew last week, with news that Daniel
Mudd and Richard Syron, the ousted chief executives of Fannie Mae and
Freddie Mac, could be due as much as $24 million combined, after the
government took over the companies. Several lawmakers, including U.S.
presidential candidate Sen. Barack Obama, asked regulators to review or
reduce the payments.

Other payouts last year were larger: $29.5 million for
former Citigroup Inc. CEO Charles Prince, $161.5 million for former
Merrill Lynch & Co. CEO Stan O'Neal and $210 million for former
Home Depot Inc. CEO Robert Nardelli. Each was ousted or resigned under

Compensation experts say outsized exit packages remain
a tricky problem, even as more pay is linked to performance. Severance
pay is typically written into employment agreements crafted to attract
top talent, they say.

"It's all negotiated at a time when everyone is sure
that nothing bad is going to happen -- sort of like prenuptial
agreements," says Mark Borges, a principal at San Jose, Calif.,
consultancy Compensia Inc.

A 2007 study of 137 large companies by data-tracker
Equilar Inc. found that 72% of the CEOs had severance agreements and
82% were promised exit packages if they lost their jobs following a
corporate takeover, or "change in control."

Also stoking criticism of severance pay: new rules
requiring companies to disclose prospective payments. In Equilar's
study, the median CEO would receive $21 million for being ousted and
$29 million following a change in control. Those figures included cash
severance payments and the value of accelerated equity grants. They
also included deferred compensation and retirement benefits, which many
pay consultants argue are less severance than payment for past service.

Pension and deferred compensation accounts for $5
million of Mr. Mudd's estimated $9.2 million in exit pay and $1.5
million of Mr. Syron's $14.9 million. Messrs. Prince and O'Neal didn't
receive any cash severance: their awards consisted mainly of stock and

Severance packages typically include two to three
times an executive's annual salary and bonus, plus equity and
perquisites ranging from lifetime health care to relocation payments,
consultants say.

Some companies are trimming once-lavish plans. Pharmaceutical company Wyeth
in 2006 amended its change-in-control provisions, effective next year,
to drop some perks and exclude the value of stock grants in calculating

The changes reduced to $18.3 million, from $38
million, the amount due CEO Bernard Poussot if he is fired following a
takeover, according to Wyeth's 2008 proxy. Wyeth attributed the changes
in its proxy to "changed circumstances" of the company and the
pharmaceutical industry.

Corp., a maker of high-tech gear, last year reduced its
change-of-control severance to one year of salary and bonus, instead of
two. Chief Financial Officer Rob Wolf says the change followed a survey
that found most peers offering one-year payments.

Some companies are changing plans that calculated
severance payments based on targeted bonuses, rather than the amounts
earned, says Michael Sirkin, who heads the executive-compensation
practice at law firm Proskauer Rose LLP. Others are abandoning the
accelerated vesting of stocks for departing executives, or linking such
vesting to performance.

Double Eagle, a Casper, Wyo., oil-and-gas exploration
and development company, had advantages in crafting reformed severance
policies. Many executives were new, and didn't object to the board's
intent; their predecessors hadn't had employment agreements.

Directors drafted severance agreements that granted up
to three years of salary in some cases. But directors wanted to make
sure shareholders wouldn't be penalized if an executive failed, says
Mr. Balaban.

The board hired a compensation consultant. Directors
and executives had a "lively discussion" on how to define poor
performance, recalls Kurtis Hooley, Double Eagle's chief financial
officer. Executives asked: "What if you don't like me any more?"

The directors and executives agreed on performance
goals, including financial targets like earnings per share and revenue
growth as well as individual job objectives. Ultimately, executives
trusted the board to be fair, says Mr. Hooley.

"If you're going to provide me with security, I should
provide some security back to the company that I'll perform as
promised," says Mr. Hooley.

Write to Phred Dvorak at

AMP Section Name:Executive Compensation