This week, NACD Directors Daily has featured several stories noting an uptick in merger and acquisitions activity, as well as the executive severance packages that ensue. According to the Wall Street Journal, several current CEOs stand to earn over $50 million from pending acquisitions. An additional four CEOs could potentially receive severance packages worth up to $30 million.
“Golden parachutes” guarantee compensation to executives who lose their position. First established in the 1970s, they evolved into a tool used to encourage executives to agree to profitable takeovers, rather than oppose an offer that could potentially impact their job security. Excessive golden parachutes have long been the subject of investor scrutiny. In 2007, NACD addressed golden parachutes in its Report of the NACD Blue Ribbon Commission on Executive Compensation. In order to avoid severance from becoming excessive, the Commission recommended packages be tied to base pay only—not stock options as well.
In addition to say on pay, the Dodd-Frank Act included an advisory shareholder vote on golden parachutes. However, the “say-on-golden-parachute” rules did not take effect until April 25, resulting in few votes during the most recent proxy season. According to the 2011 U.S. Postseason Report from Institutional Shareholder Services (ISS), 14 companies from the Russell 3000 conducted golden parachute votes. Of those 14 companies, six received more than 89 percent support. Unsurprisingly, shareholders tended to vote against severance packages that included excise tax gross-up payments. According to ISS, “many investors do view the golden parachute proposal separately from the underlying change-in-control transaction, meaning that they might still oppose the golden parachute payments while supporting an underlying transaction.”
In addition to the cost of the awarded golden parachute, large compensation packages for departing executives can leave the directors and/or the company to potential liability claims if the awards are not based on sound business judgment and careful committee and board deliberations. Especially in the current period of increased public scrutiny on the boardroom, directors should carefully consider the terms, triggers and potential costs of various exit scenarios—including M&A activity—with executive compensation packages.