Expect the next area of scrutiny in executive pay packages to be post-employment compensation - everything from change-in-control packages, severance arrangements and retirement to nonqualified deferred compensation.
``These are all things that everyone knew existed, but, in the past, there was no way of quantifying the total amount,'' said Alexander Cwirko-Godycki, research manager with Equilar Inc., an executive compensation research firm in Redwood City, Calif.
But companies now are required to detail such compensation in tables. And with the $200 million-plus departure packages of Henry McKinnell of Pfizer Inc. and Robert Nardelli, former Home Depot and now Chrysler Corp. chairman and chief executive officer, still fresh in everyone's mind, consultants and shareholders are pressuring companies to take a fresh approach.
``These disclosures have revealed potential significant payouts from [supplemental employee retirement plans], severance payments, tax gross-ups and accelerated vesting of options and restricted stock, and are causing many `holy cow' reactions,'' said Ira Key in a telephone interview. Key is director of the compensation practice at Watson Wyatt Worldwide Inc., a global management consulting firm in Washington.
According to Equilar, the median potential payout at Fortune 200 companies for executives in line to receive severance is about $21 million, based on proxy statements filed under the new reporting rules. The estimated potential median payment for executives in line to receive change-in-command packages is even higher - $28.6 million.
``For a lot of companies, this is the first time that they ran detailed calculations around these packages,'' said Ron Bottano, managing director for Executive Compensation Advisors, a Korn/Ferry International company based in Los Angeles. ``And it has brought to light that they don't really make sense. Those packages are all contingency-driven, but no one really ran the numbers or looked at them closely under multiple scenarios before.''
With those huge numbers attached to those exit packages, it is not surprising that recent Watson Wyatt surveys of institutional investors - who hold 61.2 percent of all U.S. equities - found 74 percent of them think severance plans for involuntarily terminations are shareholder-unfriendly and 64 percent think change-in-control agreements are shareholder-unfriendly as well.
Although the exit packages for plastics industry executives for the most part aren't as high as the median levels at Fortune 200 companies, the proxy statements of companies on the Plastics News executive compensation list disclose some rather hefty packages at Bemis Co. Inc., Hexcel Corp., Newell Rubbermaid Inc., Pactiv Corp. and Tupperware Brands Corp. - companies whose top executives are among the top 11 most highly paid executives in the industry.
* Jeffrey Curler, chairman, CEO and president of Bemis, has a projected change-in-control package of $29.3 million that includes an immediate cash severance of $13.2 million and $6.85 million to cover excise taxes he would incur. The cash settlement represents three times his annual base salary, three times the highest bonus paid, a cash payment equal to the value of his restricted 2006 stock award and three times his benefits costs calculated at 30 percent of base pay. In addition, the present value of his retirement package is $10.5 million. Change-in-control packages for the four next highest-paid executives total about $44.5 million and retirement packages, $13.2 million.
* The top-paid CEO on Plastics News' chart, Mark Ketchum of Newell Rubbermaid, has a projected change-in-control package of $14 million. That amount includes $3.68 million to cover excise taxes and represents two times his base salary and bonus. Change-in-control packages for the four next highest-paid executives total $25.3 million.
* Richard Wambold, chairman and CEO of Pactiv, has a projected $21.9 million change-in-control package, including nearly $6.3 million for excise taxes. The next four have packages totaling nearly $33.8 million.
* Rick Goings, chairman and CEO of Tupperware, has a projected $17.9 million change-in-control package; the next four, $12.1 million.
* David Berges, chairman of Hexcel Corp., has a projected change-in-control package of nearly $12.4 million, including $3.8 million to cover excise taxes; the next four executives total $7.1 million.
``A lot of the criticism around executive pay is this whole notion of pay for failure and getting $10 [million] to $15 [million] to $20 million when they go out the door,'' said Andrew Goldstein, central division practice leader of executive compensation in the Chicago office of Watson Wyatt.
The reasoning behind creating such packages traditionally has been to give the executive a bridge until he gets another job, Goldstein said.
``But how do you rationalize the need for that?'' he asked rhetorically, when many of them have accumulated wealth of as much as $100 million because of incentive compensation packages and company stock ownership mandates, and when workers, under the best of circumstances, rarely get more than one week of pay for each year of service.
Goldstein said Watson Wyatt recommends companies switch to ``declining severance'' or add a wear-away provision so that the package goes away after a certain number of years. ``There are not a lot of companies picking that idea up today, but it is a notion that makes sense to us.
``The risk is in the early years,'' he said. ``If someone has been paid $2 [million] to $4 million a year and been there four, five, six years, it casts severance in a different light. There no longer is a need for it. Severance should not be as critical at that point because of value gains elsewhere from compensation.''
However, don't expect dramatic changes in the near future, as many of the current change-in-control, severance and retirement packages are in contracts that would be difficult to alter.
``The changes will be slow to occur because they are embedded into compensation and you have programs with long tails,'' said Joe Mallin, managing director in the Atlanta office of executive compensation consultant Pearl Meyer & Partners. ``But over time, there will be reviews of those packages that will lead to change.''
Goldstein said some boards already are ``ratcheting down'' severance packages as they recruit new senior executives into the organization. ``They are offering reduced cash severance exit packages: 25-33 percent lower and for two years instead of three.''
Going forward, Goldstein said while severance packages are likely to shrink, they are not going to disappear.
``You can't recruit people without them, as it is a high-risk job, and how are you going to get someone to take the risk without a safety net?'' he said.
As for change-in-control packages, companies are starting to shift away from single-trigger payouts.
For example, in addition to a change in control at the company, an executive also would have to be let go before the provisions of the agreement - which typically include the immediate acceleration and vesting of stock awards - go into effect.
``In the '80s, there was immediate acceleration of vesting in the case of a takeover and it actually made sense because there was a hostile takeover environment,'' said Steve Van Putten, advanced senior manager and senior director of executive compensation in the Wellesley, Mass., office of Watson Wyatt. ``But a single trigger doesn't make sense now. So many companies are putting in a double trigger - that is, there has to be a change in control and the employee has to be terminated.''
Because of the large numbers and because things like supplemental employee retirement plans, severance and change-in-control packages are not directly related to performance, Van Putten said he expects most of the discussions around executive compensation are going to be around indirect compensation.
Bill Coleman, senior vice president of compensation at Waltham, Mass.-based Salary.com, agreed. ``All of the nonroutine payments - huge signing bonuses, guaranteed bonuses, accelerated vesting of stock options, guaranteed severance - are things that cause people to blow up when they see them.
``There is some justification for change-in-control or golden parachutes, but it is hard to justify and say it is pay for performance with severance,'' said Coleman, who heads Salary.com's compensation and content teams that research and publish the company's findings on compensation data.
``Too often, severance packages are put in so a company can pay an executive to go away if he doesn't work out. That needs to be addressed,'' he said.
There is a question as to whether the change-in-control packages are achieving what they are designed to do.
``We do not believe that immediate acceleration of unvested equity'' accomplishes the stated goal of many companies to allow executives to share in the value they have ``unlocked'' for shareholders by putting the deal together, according to Watson Wyatt's Kay.
``We are wary of provisions that encourage management to dress up the value of the company to maximize its current value, while disregarding the longer-term implications.''
Similarly, he said, provisions that immediately cash out the in-the-money value of options upon a change in control ``tend to exacerbate a disconnect from shareholder interests'' and, at the same time, force the buyer to quickly create new compensation programs to keep management interested and engaged after the change-in-control.
Used properly, change-in-control and severance provisions can produce behaviors that benefit executives, companies and shareholders, according to Kay.
``But boards and compensation committees must think carefully about how and when to implement these provisions,'' Kay said.
* * *
Jeffrey Curler
Chairman, CEO & president
Bemis Co. Inc.
Total 2006 compensation: $6.27 million
Projected change-in-control package: $29.3 million
Current retirement package value: $10.5 million
* * *
Mark Ketchum
CEO & president
Newell Rubbermaid Inc.
Total 2006 compensation: $8.35 million
Projected change-in-control package: $14 million
* * *
Richard Wambold
Chairman & CEO
Pactiv Corp.
Total 2006 compensation: $5.5 million
Projected change-in-control package: $21.9 million
* * *
Rick Goings
Chairman & CEO
Tupperware Brands Corp.
Total 2006 compensation: $5.42 million
Projected change-in-control package: $17.9 million
