Kilts payout: the last great deal?

THE $57 BILLION MERGER of Gillette and Procter & Gamble was definitely big news. It marked the end of an era for the 104-year-old seller of consumer products and made P & G the world's largest household goods maker.

But Gillette CEO Jim Kilts's sizeable gain--about $153 million--captured as many headlines as the megadeal itself. The high dollar amount, taken alongside expected layoffs of about 6,000 at the combined entity, prompted Massachusetts Secretary of State William Galvin to immediately launch a probe. Galvin told the Wall Street Journal that he was particularly interested in the $12.6 million change-of-control cash payment Kilts received.

All of which raises the question of whether pay packages with change-in-control incentives present an inherent conflict of interest. Are CEOs--who are allowed to parachute out to safety with a huge severance not tied to whether the merger succeeds--motivated to flip the company for personal gain rather than shareholder or employee benefit? And, in this specific case, did Kilts sell out to P & G to reap a personal windfall?

"It's easy to say that," says Leslie Gaines-Ross, author of CEO Capital: A Guide to Building CEO Reputation and Success and chief knowledge and research officer for Burson-Marsteller, which doesn't represent Gillette. "But when you look at the character of this individual, it just doesn't match up. Jim Kilts has been totally about restoring the reputation and integrity and products of Gillette. It was never about him."

The media hype, she adds, once again misses the crucial point: Kilts added about $20 billion in shareholder value since arriving at the troubled Boston company in 2001, more than doubling its share price. Had he not turned things around, billions of dollars of shareholder value and thousands of jobs might have been lost. Nearly three-quarters of the $153 million comes from the boost in share price, which all shareholders enjoyed, and of that, $32.5 million represented a gain related to the merger announcement.

Perhaps the question is whether the change-in-control severance provisions--in this case, about $20 million including an $8 million pension credit--agreed to by Gillette's board were just too high. But some would argue that enticing a turnaround artist to join a troubled company, always a takeover target, isn't easy--and the pay must be right. "You don't want them to be anti the deal because they're afraid of losing their job, but you don't want them to be so well compensated that they will make the deal happen no matter what," says Edward Archer, managing director of the compensation consulting firm Pearl Meyer & Partners. "It's a fuzzy line you're trying to walk here."

And it's the board's and more specifically the compensation committee's job to figure that out, which is why directors will feel more pressure in the years ahead to offer packages they can reasonably justify. As a result, sweeteners for CEOs who take on tough challenges like Gillette won't be as sugary as they once were. Kilts may have gotten one of the last great deals.

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