The Golden Parachute Club of 2006

Top executives who left their companies this year were rewarded with rich pay packages. But is this the last hoorah?

by Moira Herbst

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Back in April, shareholder groups at Pfizer's annual meeting made it abundantly clear that they'd had enough with the rich payouts to then-CEO Hank McKinnell. Groups, led by the AFL-CIO, staged a raucous protest. As they handed out fliers, chanted, and held up signs to demand McKinnell return part of his pay, an airplane circled the company's annual meeting in Lincoln, Neb., with a banner reading, "Give it back, Hank!" The protesters were upset that one of the top-paid pharmaceutical executives was also going to be granted an $82 million lump sum if he ever stepped down.

But on Dec. 21, Pfizer (PFE) revealed that McKinnell, who did give up the CEO post in 2006, is getting even more money than originally thought. He'll receive a total of $122 million in retirement, as well as deferred compensation worth an additional $78 million.

The sum total of $200 million isn't going over too well among investors. "It's not reasonable to pay someone who failed as CEO this much; he's the poster child for pay-for-failure," says Daniel F. Pedrotty, director of the investment office of the AFL-CIO, whose member unions' funds hold about $568 million in Pfizer shares. "Unfortunately, once you've negotiated this and gotten it wrong, it's hard to fix."

The Bitterest of Goodbyes

A Pfizer spokesman says the company had "legal obligations" to McKinnell and "the employment agreement itself was entered into at a much different time in Pfizer's history." He added that the company has made subsequent changes to its executive compensation. The spokesman said McKinnell did not return messages seeking comment.

In Corporate America, the road for even the bitterest of goodbyes has long been paved with sweet financial rewards. Continuing a long-term trend, 2006 saw many companies parachuting executives into soft post-employment landings, whether leaving with head held high, like ExxonMobil (XOM) chief Lee Raymond, or in a cloud of controversy like McKinnell.

But with shareholder groups up in arms about executive pay and deluxe exit packages, the era of the most gilded parachutes could be coming to an end. In July the SEC adopted changes to disclosure rules on executive and director compensation that will make the details of parting packages publicly available as never before.

The required plain-English tables will break out every perk and stock option value so that shareholders can see in plain daylight information previously not reported. Compensation experts are divided as to how transformative the SEC changes will be. But many agree that while executives are unlikely to retire into insecurity anytime soon, increased scrutiny of farewell deals is likely to tie pay more to performance and trim some packages around the edges.

"This year could end up being the last hurrah for the more outrageous severance packages we have seen in the past," says Patrick McGurn, executive vice-president of Institutional Shareholder Services, a proxy advisory firm.

Shareholder Groundswell

Amid soaring executive pay and stock option backdating and other scandals, shareholder groups were not shy about voicing anger about pay levels and spectacular severance packages this year—and their outcry led to the SEC's vote for more disclosure. Sixteen shareholder proposals calling for binding votes on excessive severance arrangements were voted on in 2006. On average the proposals garnered 51.2% support, says McGurn. The high water mark was Ryland Group's 73%.

One of the year's most controversial golden parachutes was awarded to former KB Home (KBH) executive Bruce Karatz. A;though his luxurious pay while on the job didn't please shareholders, many industry observers thought Karatz' sound performance merited a reward.