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It Pays to FAIL?

Severance pay is on the rise. But the CEOs who get it--and the companies that bestow it--are under the gun.

The $47.1 million given in severence to Stephen C. Hilbert, the former CEO of Conseco, is exhibit A in the case of stratospheric pay. Hilbert built the insurance company, but the also made the mistakes that nearly drove the company under. But Conseco is just one of a litany of companies that rewarded failure with millions in 2000.

* Heileg-Meyers, the furniture retailer, fell into bankruptcy, but its CEO walked away with $8.1 million in severance.

* The chairman and CEO of GTECH Holdings Corp., the lottery company, was pushed out by the board of director for non-performance, but tool $8 million in severance with him.

* Doug Ivester, former CEO of Coca-Cola, left under a cloud, carrying severance that will approach $120 million.

* Jill Barad, former CEO of Mattel, stepped down with a severance estimated in the range of $37 million.

* Bob Annunziata walked away from the CEO post at Global Crossing after just one year with $15.9 million in severance.

* Durk Jager lasted just 17 months at the helm of Procter & Gamble but left with severance pay of $9.5 million.

Add to these examples notorious cases of CEOs leaving after mergers with fat pay for stepping down. Heading the list in this category is the payout to CEO Frank Newman, who stepped down with a $55 million package after Bankers Trust was taken over by Deutsche Bank. On his heels was BankAmerica's CEO, David Coulter, who was guaranteed $5 million annually for life when NationsBank took over BankAmerica, whether he worked for the merged companies or not. Coulter quit a month after the deal closed.

Some observers justify these generous packages as necessary, citing everything from the necessity of rewarding lengthy company service to the need to outline a hefty safety net to lure a quality CEO away from another firm. Others argue they're purely the result of a combination of CEO greed and weak boards that don't have the spines to stand up to CEOs. These critics suggest two real reasons for huge severance payouts:

1. Boards are willing to give these payouts, so CEOs take them.

2. CEOs know their lifespans in office are short so they take care to com pensate themselves if boards throw them out early.

While many factors are behind the escalating severance packages, both CEOs and boards should be concerned about public perception on the issue. During the long bull market run, there's been little impetus to rein in either compensation or severance, but once an economic downturn takes hold--as it may have already--regulators and Congress will pay more heed to disgruntled consumers and shareholders. When that happens, not only severance packages, but CEO pay will come under the microscope--leaving CEOs with much more to lose than hefty payouts for failing or being pushed out.

The evidence marshaled against CEOs will be powerful. The AFL-CIO keeps statistics on CEO-to-worker pay ratios that they claim show average CEO pay in the U.S. has risen from 42 times the average blue-collar worker's salary in 1980 to 475 times the average blue-collar worker's salary in 1999. The union also keeps global statistics that show U.S. CEOs outstripping even the best-paid CEOs of other countries by nearly 10 times. The AFL-CIO argues that the value CEOs have created for shareholders does not measure up to the compensation CEOs demand and get. Interestingly, the union's analysis does not take into account severances, which would enhance its case, nor does it point out that CEO severances far outweigh those that other top corporate officers get. Thus far, the economic class warfare that unions and other organizations are waging is fomenting around pay and severance has not taken hold. But the murmuring has started, and that's not a good sign.

CEOs themselves differ on the severance issue. Some have protested the payouts in public, which won't help those who defend large severances. Others counter that such severance payouts are not the norm, an argument that is irrelevant. Large severances will be cited--and presented as the norm-- by those seeking larger changes in CEO compensation.

Boards and CEOs have been shortsighted in allowing both severance and pay to escalate without defendable reasons. The arguments currently presented have not proved persuasive, especially to workers who have been downsized or have not seen their pay rise proportionally to that of CEOs.

Before hiring a new CEO, boards should develop a policy on how to handle severance. The question of what to pay a CEO to disappear will always be a matter of judgment, but there should be boundaries and guidelines that are clear and defendable to shareholders and others. While there's merit in letting a failed CEO down easy, there's no future in making the reward for failure even greater than the reward for succeeding, as some claim Mattel's board did for Jill Barad. Clearly, it's time for the issue of severances to be re-examined before rules are thrust upon them through law or regulation.

Jim Drury is vice chairman, Americas of Spencer Stuart.
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Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:severance pay
Author:DRURY, JIM
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Date:Feb 1, 2001
Words:856
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