Posted by Marc Hodak on October 4, 2010 under Executive compensation | 
- You want a bonus for what?
United and Continental have completed a critical part of their merger, i.e., agreement on how much their surviving executives will make. The terms of those agreements are apparently newsworthy. In the case of Continental CEO Jeff Sismek, who is about to become CEO of the combined entity, he will get a salary of $975,000, a target annual bonus of $1.46 million, and a target long-term incentive of $8.4 million. United’s CEO, Glenn Tilton, will become Chairman of the combined company for two years, until Sismek takes over that job, as well. Tilton will also get a severance of about $5 million in stock over those two years. Nice consolation prize. The interesting thing is that Sismek will also get “a one-time merger incentive target of $4 million.”
Excuse me?
Many of the wounding criticisms faced by boards about how they set CEO pay have frankly been self-inflicted. A lot of it has to do with how compensation practices, and the language to describe them, have evolved over the last several decades. Back in the day, before anti-takeover statutes made it hard for corporate raiders to jump in and clean house, a CEO who lost a takeover battle was given his walking papers and told, “Adios.” When anti-takeover laws gave CEOs and effective veto over M&A deals where they might get fired, the golden parachute was born, which was effectively a bribe for executives to allow the deal to happen. You’ve invested 20 to 30 years climbing the corporate ladder to become leader of your company and, bam, the shareholders are better off selling it out from under you. Boo hoo, here’s a few million to make you feel better. Well, it was much better for the shareholders to agree to that than to possibly lose a billion dollar premium because the CEO unobservably got in the way of the deal. I get all that.
But an incentive to stay? What the heck is that about? Along the way, someone decided that if the departing CEO was going to get a consolation prize, the retained CEO should get something too. Who decided this? The compensation consultant looking to keep his or her job with the new management? The egomaniac jealous of the guy with the golden parachute? Wherever this invention began, once a few companies began doing merger incentives, it became the “norm.” One thing that fairly describes public company boards and their comp consultants today is an obsession with not sticking out, with doing what everyone else is doing no matter if you understand or not the original reason it was done.
At this point, the merger incentive–a bonus for sticking around–has somehow become acceptable compensation language. Geez-us. Couldn’t they at least call it a re-signing bonus, or a consolidation incentive, or something that doesn’t sound like a reward for keeping a job they would have paid you big bucks to give up? There may be a genuine retention risk with Sismek that the board was trying to avert. But a $4 million “merger incentive” doesn’t sound like the most pressing use of shareholder money.
Posted by Marc Hodak on October 3, 2010 under Governance, Reporting on pay |
You have to wonder what the HP board has been doing for the last five years while Mark Hurd was their CEO. One of the board’s main jobs is to hire a CEO, which supposedly includes succession planning, which supposedly includes the “hit by a bus” scenario where your CEO is suddenly gone as happened with Hurd in August. The board is supposed to insure that the CEO is developing his or her bench as part of their job. It has long been shown that CEOs hired from within tend to outperform CEOs hired from outside, especially at firms whose competitive advantage arises, in part, from their corporate culture. One can argue that the HP Way has long since gone the way of the K-Mart blue light special, but you’d think that in five years the board would have pressed for and gotten Hurd to develop a potential replacement or two.
No. They went outside, again, and they literally paid for it. The MSM said they paid to the tune of $51 million, but that’s because that was the biggest number they could wring out of Leo Apotheker’s contract. That amount may reflect multiple years or maximum amounts based on future performance–it’s not clear which from the story–but my calculation is about half that amount per year in each of the next two years if he achieves target performance. Alas, $24 million per year is still about $10 million per year more than one might expect for an internally promoted CEO who, if he or she were well prepared, would likely have performed better than Mr. Apotheker, and not created a retention problem with every ambitious HP executive whose path to the top has suddenly gotten more rutted and overgrown.
I understand that sometimes one must go outside of the firm when it’s in trouble or otherwise in need of major change. I don’t think too many people considered HP under Hurd to be troubled, until Hurd left. I don’t work with HP’s board, so I don’t know if it was the board’s failure or Hurd’s failure that they couldn’t groom at least one internal replacement, or if none of their EVPs who will now be heavily recruited for CEO positions elsewhere were simply not good enough for the company in which they have performed so well.
Posted by Marc Hodak on October 1, 2010 under Reporting on pay |
They could go to Citigroup, as UBS found out in losing its top energy investment banker. The upper half of the article was all about the money, which is really the only reason for such an article being on the front page. Does the average WSJ reader care at all about Citi’s internal staffing decisions? Finally, as the article winds down the inverted pyramid, they mention that there was actually a talent auction of sorts:
After Citigroup made a play for Mr. Trauber, UBS tried to work on a compensation package for him, but the firm was unwilling to meet several of his other proposals, which included getting 150 hours of access to a private plane annually and that a separate bonus pool be allocated for his specialized team of bankers, the people said.
We kept hearing that ridiculous question “Where else could they go?” throughout 2008 and 2009 when Joe Public began learning how much more bankers made than he did. The sense of the articles, and the way the readers invariably perceived such high pay, was that it was arbitrarily high, and that it could be restrained by government fiat–and should be. The utter lack of thought about the consequences of such restraint is natural if one believes that the pay level was arbitrary to begin with. “Where else could they go?” To the highest bidder, folks, just everything else in the market.
