CEO exit packages are out of control

These days, CEO exit packages are like hitting the lottery. It's enough to make you sick.

Steve Tobak
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Steve Tobak is a consultant and former high-tech senior executive. He's managing partner of Invisor Consulting, a management consulting and business strategy firm. Contact Steve or follow him on Facebook, Twitter or LinkedIn.
Steve Tobak
5 min read

When most of us quit a job, we give two weeks notice, collect our final check and we're out the door. Maybe we have some stock options to exercise within 30 days, but that's about it. When we get fired it's even simpler - same thing except no notice.

In a prior post, we discussed strategies for negotiating an exit package - a sort of self-inflicted layoff. If you're lucky and a great negotiator, that might get you a few months of salary, stock option vesting, and extension of benefits, depending on your management level and longevity with the company.

So, when we exit a company through whichever door, we're talking a few thousand bucks if you're a regular Joe, maybe up to six figures if you're a VP who's been with the company a while.

CEO exit packages are similar in concept to those mere mortals might hope to negotiate, but that's where the similarity ends. The end result is more like hitting the lottery.

Sure, some of the huge payouts you read about are mostly the sum total of pensions, long-term compensation, and stock options or restricted stock awards accumulated during the CEO's employment. But some of them are negotiated deals triggered by premature termination. In other words, they screw up and get rich.

The best example of how ridiculous this can get is the story of Michael Ovitz, the Hollywood super-agent hired by Michael Eisner to be Disney's president in 1995. Ovitz negotiated a five year employment contract that included an annual base salary of $1 million, a discretionary bonus, and 1 million stock options per year at an exercise price of the market value of the stock.

The problem with the agreement was the termination clause (you can view it here if you have the patience to wade through Disney's proxy statement). To make a long story short, Ovitz's tenure with the company was a disaster. He was fired after 14 months, and for that he got a check for $39 million and immediate vesting of 3 million shares of stock - a value of $101 million at the time. Total payout: $140 million.

It's enough to make you sick.

According to a survey by Equilar - an executive pay research company - the average potential exit payout for Fortune 200 CEOs was $21 million last year. That's the average. Wait until you see some of the big ones.

There is some good news, though. Many of the biggest high-tech companies shun exit packages for their executives. According to their latest proxy statements, Cisco, Google, Intel and Microsoft have no employment or termination agreements with their executive officers. And that's as it should be. After all, don't they make enough when they're actually working for it?

Top ten CEO payouts
Without further ado, here are my top ten favorite CEO payouts. In some cases they weren't exactly negotiated "packages," but what they walked away with when they exited the company. These aren't necessarily the biggest, but the ones that got my attention.

Disclaimer: this stuff is notoriously complex, difficult to calculate, and dependent on the value of the company's shares at the time. I don't vouch for the accuracy of the numbers, but they've all been widely reported as such. Also, some of the most recent ones are still being contested.

1. UnitedHealth Group's William McGuire could walk away with $1.1 billion in stock options, retirement payouts and other benefits. And this is after he allegedly defrauded shareholders in the stock option backdating scandal that started an avalanche of CEO exits and financial restatements across corporate America.

2. Lee Raymond of ExxonMobil walked away with a $400 million payout. Huge number, but most of it is retirement independent and accrued over 40 years of employment and 12 years of running the company. And God knows, those were big years for the oil giant. Shareholders aren't complaining about this one.

3. Home Depot chief Robert Nardelli's severance package was $210 million. The company's poor performance under Nardelli's six-year watch was widely publicized, but the party line was that his resignation was mutually agreed upon by Nardelli and the board. Who wouldn't agree to leave for that much money?

4. Hank McKinnell of Pfizer was forced into early retirement after 5 years. The stock slide was one thing, but adding insult to injury was his retirement package, reported to be about $180 million.

5. Dick Grasso, CEO of the New York Stock Exchange was ousted over a deferred compensation package of $140 million plus an additional $48 million for something or other. He had spent 36 years at the exchange, though.

6. AT&T's CEO Ed Whitacre picked up $158 million plus up to $106 million more, if certain conditions are met. As an aside, the current incarnation of AT&T began with Whitacre at the helm of Southwestern Bell Telephone Company in 1990. He built quite an empire in 17 years.

7. My favorite of the bunch is Michael Ovitz, who picked up $140 million when he was fired just 14 months after being hired as Disney's president. Shareholders filed suit, but neither the board nor Ovitz's boss - Michael Eisner - were found culpable in this king of all corporate governance debacles.

8. Kevin Rollins received a total of about $60 million when he resigned from Dell after three years in the hot seat. Most of that was a payout in lieu of stock options that were frozen due to Dell's stock option backdating investigation.

9. Remember Carly Fiorina? HP's rock-star CEO got a $42 million severance payout when she was ousted after 5 long years at the helm of the computer giant. The board learned its lesson and hired Mark Hurd who effortlessly (it seemed) turned the company around.

10. Yahoo's Terry Semel actually resigned with no severance package, but he made over $400 million during the prior three years with the company.

They say it's lonely at the top, but anybody who can't make friends with that much money has bigger problems than loneliness.

The bottom line:
Many, if not most, of the best CEOs of our time were either promoted from within or recruited without big pay packages. Boards need to stop acting as if CEO candidates have them over a barrel or we, as shareholders, need to find new boards. It's as simple as that. I, for one, am sick of paying for someone else's lottery ticket.