[Mb-civic] NYTimes.com Article: No Wonder C.E.O.' s Love Those Mergers

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No Wonder C.E.O.'s Love Those Mergers

July 18, 2004
 By GRETCHEN MORGENSON 



 

SHAREHOLDERS like it when their companies are acquired,
because their stocks rise in value. Chief executives like
it, too, because their severance agreements kick in. And
that means they can become truly, titanically, stupefyingly
rich. 

Wallace R. Barr, the chief executive of Caesars
Entertainment, is the latest to line up for his barrel of
bucks. Last week, Harrah's announced it would acquire
Caesars for $5.2 billion. Thanks to accelerated vesting of
options and stock awards, Mr. Barr stands to receive almost
$20 million under so-called change-of-control provisions in
his contract. And if Mr. Barr resigns from Caesars "for
good reason," the contract says, he is entitled to an
additional $6.6 million after the two companies merge. 

A spokesman for Caesars did not return a phone call seeking
comment. 

Then there was Wachovia's proposed acquisition of the
SouthTrust Corporation last month. Equilar Inc., a
compensation analysis firm in San Mateo, Calif., said the
terms of the deal would give Wallace D. Malone Jr., the
chief executive of SouthTrust. $59 million in termination
awards, stock awards and options over the next five years
if he leaves the bank. He also appears to be entitled to an
annual pension of about $3.8 million. 

At least Mr. Malone has said he would donate some of this
bounty to charity. A spokeswoman for SouthTrust did not
return a phone call seeking comment. 

"In theory, change-in-control provisions make sense," said
Tim Ranzetta, the president of Equilar. "They encourage
executives to act in the best interests of shareholders in
transactions that they anticipate will increase shareholder
value, which at the same time may harm their own careers.
But empirical research seems to indicate that most
companies underperform relative to the market after a
merger while executives benefit from these large, one-time
payouts." 

Amazingly few shareholders have carped about these
giveaways. The California Public Employees' Retirement
System, the big pension fund known as Calpers, voted
against last month's merger of two health care companies,
Anthem Inc. and WellPoint Health Networks, citing excessive
pay. Executives stood to receive bonuses, severance
payments and vested stock options totaling approximately
$200 million in the deal. Leonard D. Schaeffer, WellPoint's
chief executive, was entitled to $47 million in severance,
stock options and enhanced retirement benefits, an Anthem
spokesman said. 

Nobody else seemed to mind. Shareholders approved the
merger on June 28. 

One reason that shareholder outrage has been muted may be
that few people, beyond the executives themselves and maybe
the company's compensation committee, know how costly these
pay deals are. Even with all the scrutiny of corporate
governance in recent years, a full tally of what executives
will earn in retirement or under a change of control is
simply not disclosed. Not anywhere. 

Experts say that many compensation committees do not
understand the size of these pay packages because they do
not routinely ask their consultants for detailed lists of
the various pay components. 

And, my, how the list of goodies can go on. First comes the
executives' severance pay, almost always nearly three times
salary and bonus. Accelerated vesting of stock options and
stock awards quickly follows; sometimes the options are
granted with their full terms remaining - up to 10 years -
giving them tremendous value. 

Then there are the three additional years of pension
credits that get tacked on to an executive's pay, as well
as the 401(k) match, years of health care benefits and the
cash value of perquisites at the time of termination - such
as use of the corporate jet, country-club memberships,
allowances for financial planning advice, office space and
secretarial services. All in one delightfully fat lump sum.


AND don't forget that executives' pensions are often based
on the unusually high severance pay, which ratchets the
numbers way up. 

Of course, one downside to these enormous payments is that
they generate stunning tax bills for executives. Good thing
their contracts almost always require the companies to pay.
And how! 

The so-called excise tax gross-up provisions can be so
colossal that, according to one pay expert, a major merger
was scuttled because the cost to cover executives' tax
bills exceeded $100 million. 

While chief executives receive the biggest pile of money
and perks, other managers also find their way to the
trough, pay experts say. The numbers become really crazy
when, as is often the case, the exit agreements of both
companies' executives become effective in a merger. 

As a result, said Michael S. Kesner, principal in charge of
the executive compensation practice at Deloitte Consulting,
it is not uncommon for payouts to management to reach 8
percent of a merger's total cost. 

Yet shareholders have no way to know about all this in
advance because it is hidden from view. The attitude seems
to be: why bother the owners with chapter and verse on what
the hired help will get? 

Even absent a merger, a company's contractual obligations
to its executives are huge. It is an outrage that these
obligations - including deferred compensation and
supplemental retirement plans - and their amounts, are not
disclosed annually, in plain and comprehensible terms. 

Compensation disclosure rules, mandated by the Securities
and Exchange Commission, have not changed since 1993.
During that time, executive compensation packages have
become much more creative, not to mention outrageous. 

"Disclosure definitely needs to be improved and
compensation committees need to know what the totals are,"
Mr. Kesner said. "That would make a huge difference." 

Regulators do not seem focused on increasing disclosure in
this area. If they do not force the issue, and soon, firms
providing proxy voting advice to institutional investors
can help the process along. The big ones, like
Institutional Shareholder Services and Glass, Lewis &
Company, should advise clients to vote against a company's
compensation plan or directors who serve on compensation
committees unless they receive the full terms of these
contracts. 

Jesse M. Brill, a securities and compensation lawyer and
chairman of the National Association of Stock Plan
Professionals, has some advice for compensation committees
of corporate boards: Tally the total compensation that
executives are in line to receive, especially in a
takeover, or else. 

In a recent article in The Corporate Counsel, a newsletter
covering corporate and securities law issues, Mr. Brill
outlined steps that compensation committees must take to
ensure they meet fiduciary duties to shareholders in the
area of executive pay. The article is at
www.compensationstandards.com. 

"Once those numbers are put together in one place it's
going to open a lot of eyes," Mr. Brill said. "That,
combined with the fear of personal exposure, will cause
some people to make some very significant changes in
compensation." 

Which is one of the things the world needs now.


http://www.nytimes.com/2004/07/18/business/yourmoney/18watch.html?ex=1091174884&ei=1&en=53b0ed21dcd68791


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