Eye-popping severance packages, like those given to former Lucent executives Richard McGinn and Deborah Hopkins, Mattel CEO Jill Barad, and former Webvan CEO George T. Shaheen, can seem staggering in light of the companies’ troubles. But the terms should shock no one who was paying attention, says Brent Longnecker, executive vice president of compensation consulting firm Resources Connection Inc., based in Spring, Texas. After all, most packages are spelled out in executives’ employment agreements.
Says Longnecker, “When these plans were put into place it was a crazy time. The supply of hot-shot executives wasn’t anywhere near the demand.” While agreements “were put into place in good faith,” he adds, “no one thought of the repercussions down the road.” Shareholders, though, “have a right to ask why no one thought about this before.”
And ask they do. A study by Russell Reynolds Associates indicates that 89 percent of U.S. investors polled think severance packages for top officers are too high, and 91 percent want limits on severance packages for terminated CEOs.
A court can invalidate a severance package challenged by shareholders, but only if it finds that the agreement was negotiated without good business judgment by an independent board, with adequate due process. Longnecker says that “if a compensation committee approved a package and never even had a meeting about it, it could be in trouble. I think a lot of time they just get poor advice.”
More than 40 percent of companies surveyed by career management and consulting firm Manchester Inc. insist on such negotiated severance agreements for officers, up from 15 percent in 1997. Overall, due to increasing scrutiny the packages now face, there is a lot more discussion about them at the board level, says Longnecker. Contract durations are shorter these days, down from what he calls “insane” highs of 7 to 10 years during last year’s feeding frenzy. He sees more “claw back” and “bad boy” provisions, too, requiring forfeiture if a package’s noncompete or other terms are violated. Some shareholders would likely argue that it’s about time.