Getting a Handle on CEO Severance Pay

(page 2 of 2)

What has changed in the debate about whether compensation consultants such as yourself have a conflict of interest in working for both management and the board (BusinessWeek.com, 12/17/07)?

Consultant independence is a major conceptual issue. There are certainly a number of companies that have decided that the consultants can only work for the compensation committee. I will tell you from personal experience that, among those firms that provide other services to companies, I've never seen a problem in terms of the objectivity of pay recommendations. It's not a structural issue. I think it's a matter of the individual. Some consultants have the intestinal fortitude to stand up for what they think and tell the committee and management what they believe and stick to it. Other people waffle under pressure.

Why are so many failed CEOs walking way with huge severance payments?

The first problem is if you hire a CEO from the outside who is leaving compensation on the other company's table. If you're smart, as a hiring company, you don't cash them out of that. You transfer the obligation to your company. …The problem with that is that almost always, you're going to have to guarantee to pay it out if you terminate them for other than cause. That is what you saw with Bob Nardelli at Home Depot (HD).

If a CEO comes in from the outside, there ought to be declining protection. Suppose it says in the contract that if they are terminated without cause within three years, you're going to give them [three years of pay], you should have that decline. So after a year working for you, they only get two years of severance. After two years of working for you, they only get one year of severance. If it doesn't work out right away, yes, they are protected. But after that, they start to get something that looks more like a typical compensation program.

Will legislation to give shareholders a nonbinding "say on pay," meaning a vote on CEO compensation, happen?

It's so easy for the next Administration to do it. At a minimum, you have a Democratic Congress. Even if John McCain were elected President, he would sign it.

Holstein is an independent business journalist and author in New York.