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Golden Parachutes Appear to Be Losing Their Luster

A new report suggests that corporate boards of directors are becoming increasingly wary of so-called ‘golden parachute,' that is, change in control severance agreements.

February 3, 2012
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Related Topics: Compensation Design and Communication, Executive Compensation, Total Compensation Statements, Top Stories - Frontpage
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During the next few months, salaries and perks that leading corporations pay their chief executives will surely make headlines again as publicly traded firms begin filing 2011 year-end financial statements with the Securities and Exchange Commission.

Executive pay has become a hot-button issue as the gap between the average worker's salary and that of the top boss continues to grow. But a new report suggests that corporate boards of directors are becoming increasingly wary of so-called golden parachute severance agreements.

While the average golden parachute has jumped 32 percent in value during the past two years, pressure from shareholders—as well as new SEC disclosure rules—are driving a trend toward performance-based executive compensation, according to Alvarez & Marsal Taxand, the tax advisory affiliate of global professional services firm Alvarez & Marsal in Dallas.

The firm analyzed current golden-parachute contracts, also known as change in control arrangements, at 200 top publicly traded U.S. companies. The average payout to top executives included in the study was $30.2 million in 2011, up from $22.9 million in 2009 but still down from $38.4 million in 2007.

However, the biggest factor driving up payouts today isn't cash, but rather long-term incentives such as share performance. Long-term incentives comprised nearly 60 percent of the value of golden parachute agreements in 2011, according to the report.

"The idea is you get paid when shareholders are winning," said Brian Cumberland, managing director of Alvarez & Marsal Taxand's compensation and benefits practice.

About half of the 200 companies studied provide some form of excise tax gross-up to CEOs. But that is changing. For instance, 80 percent of top information technology companies that provide excise tax gross-ups have publicly disclosed their intention to phase them out, according to the report.

Golden parachute agreements are meant to align the CEO's personal incentives with those of company shareholders, but they don't appear to be achieving this goal, said Dirk Jenter, associate finance professor at Stanford University's Graduate School of Business.

In a December 2011 paper, Jenter looked at CEO age and company acquisitions and found that companies are far more likely to be sold when the CEO reaches retirement age. More specifically, the probability of a firm being acquired jumped by 50 percent when a chief executive reached 65 or 66 years old. Younger CEOs were much less likely to agree to a sale, Jenter said.

"The fact that we are finding this pattern suggests golden parachutes don't work the way they are supposed to work," Jenter said. "It doesn't appear they are calibrated to give CEOs the right incentives."

For younger CEOs, golden parachute contracts should be richer so there is more incentive to sell when the right deal comes along, Jenter said.

New SEC disclosure rules on executive pay mean golden parachutes might not be so golden in the future. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires companies to report additional disclosure on golden-parachute agreements in connection with mergers and to hold more frequent shareholder votes on these contracts. The SEC adopted the change in 2011.

For some shareholders, these changes can't come soon enough. Since 2000, 21 CEOs received "walk away" packages in excess of $100 million, or a total of $4 billion, according to a new report by GMI, a corporate governance research firm. GMI said AT&T Inc., Exxon Mobil Corp., General Electric Co., Home Depot Inc., Merck & Co. and UnitedHealth Group were among those 21 companies giving massive payouts to exiting CEOs.

Rebecca Vesely is a freelance writer based in San Francisco. To comment, email editors@workforce.com.

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