Believe it or not, CEO golden parachutes are shrinking
FORTUNE — $14 million for a job poorly done?
That’s reportedly what Steve Bennett, chief executive of computer security company Symantec Corp (SYMC), is set to receive following his firing last week, after spending 20 months trying — and failing — to turn around the tired software security company.
Also disclosed last week was the $80 million that Time Warner Cable (TWC) CEO, Robert Marcus, will get if the sale of his company to Comcast (CMCSA) goes through.
Despite those eye-popping figures, so-called golden parachutes that CEOs receive when they’re terminated without cause or because of a change in company control may actually be shrinking.
These payments are determined at the start of a CEO’s tenure. If a CEO is joining from the outside, a golden parachute arrangement is intended to offset some of the risk the CEO has assumed by leaving what was likely a cushy, secure position at his or her former company. The deal is also supposed to ensure that when weighing strategic decisions — like a merger that would eliminate his position — a CEO doesn’t consider what the deal would cost him personally.
These sweet exit packages fueled public outrage as the recession unfolded and executives whose companies had nearly collapsed walked away with bundles of cash and equity. There was Charles Prince, the former CEO of Citigroup (C), who left the firm in 2007 with a $41.9 million package after the bank was forced to issue multi-billion dollar write-downs related to losses from its mortgage backed securities investments. And then there was Rick Wagoner, who left his post as CEO of General Motors (GM) with $10.8 million in 2009 after the Obama administration bailed out the failing automaker and asked him to step down. Richard Syron, the former CEO of Freddie Mac, exited with $3.8 million in 2008, following the burst of the housing market bubble.
Severance packages are typically made up of a multiple of the CEO’s salary (including bonus), plus equity in the company. In 2007, 53% of CEOs at 100 randomly selected S&P 500 companies had severance packages that paid them three times their salary, according to the July-August 2013 edition of the Thomson Reuters Journal of Compensation and Benefits. In 2011, that figure dropped to 38%, as companies seemed to revert to a lower 2x multiple, the journal says. Nine percent of companies paid their CEOs twice their annual salary in severance in 2007; 20% of companies followed that formula in 2011.
Under the 2006 Securities and Exchange Commission proxy disclosure requirements, companies must tell shareholders the potential value of CEO exit packages. These disclosures have gained more scrutiny since the recession and the passage of the Dodd-Frank Act and its “say on pay” vote provision, which allows shareholders to vote to express their approval of such packages (though such votes are not binding).
Lo and behold, those transparency requirements actually seem to be working. “There’s a lot more disclosure about that than 10 years ago,” says David Larcker, a professor at the Stanford Graduate School of Business. “I think the size of these packages are coming down.”
Diminishing CEO payouts is due in part to the pressure shareholders have put on the use of companies’ tax gross-ups. During the 1980s leveraged buyout craze, Congress imposed extra taxes on CEOs whose severance packages included a salary multiplier of more than 2.99, says Mark Borges, principal at Compensia, a management consultant firm that specializes in executive compensation. So prior to the recession, when companies handed exiting CEOs at least three times their salary in severance, they would foot the execs’ tax bills. But shareholder advisory groups such as ISS and Glass-Lewis have frowned upon tax gross-ups of late — so much so that the arrangements have started to become obsolete as companies have lowered CEOs’ severance salary multiplier well below the 2.99 threshold.
“Today, shareholders don’t like seeing their money used for that purpose,” says Borges.