Human Capital & Careers

Big Severance Packages Mark Recent Deals

''Empirical research seems to indicate that most companies underperform relative to the market after a merger while executives benefit from these l...
Stephen TaubJuly 20, 2004

Sizable severance packages are alive and well, even after the passage of the Sarbanes-Oxley Act and despite a tepid economy.

As proof, just look at the payouts that several top executives are poised to receive following a few recent high-profile deals.

Wallace R. Barr, the chief executive officer of Caesars Entertainment — which last week agreed to be acquired by Harrah’s for $5.2 billion — will probably walk away with nearly $20 million under change-of-control provisions in his contract, according to The New York Times.

And should Barr resign from Caesars ”for good reason,” he is entitled to an additional $6.6 million after the merger is completed. The paper also noted that a spokesman for Caesars did not return a phone call seeking comment.

Wallace D. Malone Jr., the chief executive officer of SouthTrust Corp., stands to fare even better when he completes the sale of the bank to Wachovia for $13.7 billion.

Malone is entitled to $59 million in termination awards, stock awards, and options over the next five years if he leaves the Birmingham-based regional bank, according to the Times, which cited compensation research firm Equilar Inc. The Times noted that he also appears entitled to an annual pension of about $3.8 million. Malone reportedly will donate some of the money to charity, added the paper, which said that a SouthTrust spokeswoman did not return a phone call seeking comment.

And then there is the case of the $16.4 billion merger of health-care giants WellPoint and Anthem Inc.

The California Public Employees’ Retirement System (Calpers) opposed the deal because it calculated that WellPoint executives stood to receive bonuses, severance payments, and vested stock options totaling more than $600 million, citing documents released by the California Department of Managed Health Care.

A disproportionate share of these payouts were to go to a handful of top WellPoint executives — $76 million in severance, stock options, and enhanced retirement benefits for chairman and chief executive officer Leonard D. Schaeffer. (The Times cited a total of $200 million for all executives, including $47 million for Schaeffer.)

Despite the pension fund’s best efforts to block the deal, it was approved by shareholders at the end of June.

”In theory, change-in-control provisions make sense,” said Tim Ranzetta, the president of Equilar, according to the Times. ”They encourage executives to act in the best interests of shareholders in transactions that they anticipate will increase shareholder value, which at the same time may harm their own careers. But empirical research seems to indicate that most companies underperform relative to the market after a merger while executives benefit from these large, one-time payouts.”