An $4 million incentive to stay and make a fortune

Posted by Marc Hodak on October 4, 2010 under Executive compensation | Be the First to Comment

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.