Who’s the competition?

Posted by Marc Hodak on September 24, 2011 under Executive compensation, Reporting on pay | Be the First to Comment

The severance package of the fired CEO of Sara Lee’s North America division is in the news:

His package is worth about $11.3 million, based on Sara Lee’s share price of $17.10 as of 4 p.m. Eastern on Friday, according to a calculation for The Wall Street Journal by Mark Reilly, a partner at Compensation Consulting Consortium LLC in Chicago. The estimate reflects Friday’s value of his unvested equity and assumes he earns the pro-rated portion of his annual bonus. “It’s a competitve package,” Mr. Reilly said.

That last comment struck me:  “It’s…competitive.”  I know what the consultant was thinking when he said that.  He looked at other severance packages for departing executives of similar responsibility and similarly sized firms, and saw that, on average, they were given severances with similar terms or of similar magnitude.  That’s how comp consultants define “competitive.”

The authors of this article have been reporting on executive compensation long enough to learn the lingo of the comp consultants they rely on for the numbers they report.  It appears that they simply bought into the notion that paying the same as everyone else is, by definition, “competitive.”

Apparently neither the writers nor the consultant (not to pick on this consultant–most comp consultants use the same lingo) thought about how the word “competitive” looks to the intelligent reader, who could very well view the departing executive’s $11.3 million pay day and ask, “who were they competing against to provide that award?”  Was another company ready to offer $10 million for him to stay?  Was someone calling in with an offer of $10.5 million or $11 million if he didn’t leave?

It is likely that his severance was, in fact, established by contract or policy at the time he agreed to commit to the CEO job.  Severance is a reasonable component of an executive compensation package, especially to the extent that it consists largely of unvested stock or options in the context of a change in control.  If an executive builds a company to the point where the shareholders can cash out in a sale or merger, they want their executives to work hard to make that situation as valuable as possible, without worrying that they are cutting themselves out of the payday through forfeiture of their now valuable, but still unvested equity.  So, in a sense, the competition happened at the time the executive was hired, and the board is simply following through on a deal.

However, the average person doesn’t get millions of dollars for being fired.  So when the average person doesn’t know about the deal, which is ancient history, and when fulfillment of the deal is simply referred to as “competitive,” the average person can easily be left with the feeling that the game is rigged.  Then the average person ends up supporting Dodd-Frank and similar monstrosities.