January 17, 2006
Executive Compensation, Variation #99: Severance Pay
Posted by Christine Hurt

The topic of executive compensation has been in the blogosphere lately, namely in posts by Gordon and Larry Ribstein, and in the news.  This conversation fits in with one of our favorite debates here at the Glom:  How much do [X professionals] deserve to make?  Today I stumbled on a blog called DealLawyers, courtesy of the new Truth on the Market blogroll.  This blog looks very informative, especially as I am teaching M&A this semester.  One post from December (my birthday, actually) contained information that I had previously overlooked.  Coca-Cola adopted a policy last month that executive severance packages require shareholder approval if the value of the payout is equal to or greater than three times the executive's annual base salary plus bonus.  Very interesting.  I can't imagine that shareholders, given one thing that they could vote on, would choose severance packages, but I could be wrong.  According to the post, excessive severance packages anger shareholders the most.  This trend is not just in response to Disney's troubles with Iger's severance package, either.  Apparently, Coca-Cola has also had two executives leave in recent years with multi-million dollar severance packages after short terms of service.

I also did not know until reading this post that an executive compensation disclosure bill was pending in the house:  The Protection Against Executive Compensation Abuse Act, H.R. 109-4291.  this bill would require that issuers of a certain size not only disclose but also obtain shareholder approval for compensation of "principal executive officers," including severance compensation.  Now, I understand that all kinds of wacky bills get introduced into Congress, but this one seems fairly far-reaching.  Perhaps the SEC's proposed disclosure rules will preempt this more heavy-handed regulation.  The problem with executive compensation is not the absolute amount paid to any executive; excessive compensation reflects a possible problem whereby the Board and the officers are rewarding one another with the company's money for each being hired.  This loyalty to individuals rather than the company is the problem and won't be eliminated by executive compensation rules.  And, as I believe Larry points out, the costs to eliminate this agency problem, which constitutes a small percentage of a company's expenditures, are not justified.  Ah, but it plays well with the people!

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