Some departing tech CEOs land big money

Soft landing Whether their companies have been dogged by bad management or dragged down by an overall market decline, many CEOs have received lucrative pay packages after relatively brief tenures. Click here for more details.

In the latest examples, the former chief executives of Priceline.com and Webvan walked away with large payouts from their respective companies, even though investors have had to endure huge stock-price declines and many remaining employees are uncertain about the long-term prospects of the companies.

"This is standard procedure in America these days," said compensation expert Graef "Bud" Crystal. "There's no risk anymore in being a CEO."

Priceline, for example, gave outgoing CEO Daniel Schulman a separation package worth $5.8 million, according to a filing with the Securities and Exchange Commission.

Webvan's ex-CEO George Shaheen, 58, will collect $375,000 a year for the rest of his life--equal to $7.5 million over the next 20 years. He also had a $6.7 million loan from the struggling online grocer that was used to pay taxes essentially forgiven.

The juxtaposition of compensation packages worth millions of dollars being paid out by struggling Internet companies has surprised investors and caused a buzz at office water coolers.

"We don't ever applaud payments for failure," said Ann Yerger, director of research for the Council of Institutional Investors. "It's like pouring salt on the wound with struggling companies, when every amount of cash really counts."

Yet the salt has been flowing freely lately as some companies have offered big payouts to "cover the embarrassment of an underperforming chief," Yerger said. Instead, corporate directors should do a better job when hiring executives to structure their contracts so that they do not get rewarded when the company struggles, she said.

Investors cry "outrage"
To be sure, the market shakeout has been particularly brutal for e-commerce and countless other Net companies, which makes it difficult to determine whether an executive contributed to the problems or was merely unable to overcome a tidal wave of investor pessimism. But for the investors and employees left behind at companies where cash is rapidly evaporating, reaction to the packages ranges from curiosity to outrage.

The news of Shaheen's severance package, for instance, drew a flurry of posts on investor bulletin boards. On Yahoo, one investor threatened to file complaints with the Securities and Exchange Commission and the Nasdaq.

"The recent Shaheen deal with (Webvan) is nothing short of an outrage," the message read. "This deal is a blatant disrespect for us and our hard-earned money. We should not let them get away with this, not at a time when the stock we believe in is tanking faster than the Titanic."

Webvan shares are trading around 15 cents, compared with a 52-week high of nearly $10.

There has been an exodus in the executive suite in recent months, although not all departing CEOs have received big payouts.

Tim Koogle, who stepped down as CEO of Yahoo in March, doesn't have a severance package, said spokeswoman Nicki Dugan. Koogle is vice chairman of the board of directors and won't get any compensation when he leaves that role for a regular board position in about six months, she said.

The list of other CEOs to depart recently is long. FairMarket announced that Eileen Rudden, its chief executive and president, had resigned. Since December, CEOs have stepped down from such one-time highfliers as Ariba, Razorfish, Emachines, VerticalNet and Terra Lycos. Some have remained involved in the company they left or sit on the board of directors.

Dangling the carrot
Severance packages typically were negotiated to lure executives from established companies to take a chance on start-ups with uncertain long-term outlooks. If worse came to worse, the thinking went, at least the executives would get something for their troubles.

And in many cases, the worst-case scenario has arrived, with scores of Net companies going out of business, filing bankruptcy, laying off employees or searching desperately for a cash infusion to remain afloat.

At Norwalk, Conn.-based Priceline, the package for Schulman, who came to the company from AT&T in 1999, amounts to $1.2 million in severance pay and forgives him of $3.2 million in loans. Last year, the company forgave $4.8 million of a $9 million loan to Schulman, who became CEO in May of last year.

During Schulman's tenure Priceline's stock fell about 90 percent, and the company cut 135 jobs in two rounds of layoffs. Priceline also cut back plans to expand beyond its core travel business and saw its revenue fall 14 percent on a year-over-year basis in its most recent quarter.

Priceline spokesman Brian Ek declined to comment on Schulman's severance package.

Foster City, Calif.-based Webvan agreed to pay Shaheen $375,000 annually--and the payments will continue to be sent to Shaheen's wife should he die before her. Webvan forgave a $6.7 million loan in exchange for him turning in $150,000 worth of the now severely depressed Webvan stock.

Shaheen, who previously headed Andersen Consulting, left Webvan in April after 18 months on the job. After the stock climbed as high as $34 a share on its first day of trading in November 1999, it fell to 12 cents a share by the time Shaheen left the company.

Meanwhile, the company has canceled service in several cities, including Dallas and Sacramento, Calif., and has cut back its ambitious expansion plans.

A Webvan spokesman said the company needed to dangle an attractive retirement package to lure Shaheen away from Andersen, where he earned $4 million a year and worked for more than 30 years. Sources close to Shaheen said he gave up a large retirement package at Andersen when he jumped to Webvan.

At Emachines, exiting CEO Steve Dukker received $1.6 million. The company also will let the incoming CEO have $1 million from a special escrow account in the event his stock options become worthless by the time he can trade them.

A representative for Emachines could not immediately be reached for comment.

Because of the bloodbath on Wall Street and the economic downturn, some struggling technology companies may be trying to renegotiate severance deals with departing executives, said Judith Fischer, managing director of Executive Compensation Advisory Services, an Alexandria, Va.-based research firm. But few companies will try to get out of those agreements completely because they still need to attract future executives, she said.

Blaming the board
Corporate boards are to blame for the compensation and severance packages that some executives are receiving, said Nell Minow, editor of The Corporate Library, a Web site that provides research and reports on corporate governance. Board members should have known that an executive candidate who asked for a cushy severance package was "telling you he's the wrong person for the job," Minow said.

"CEOs will always ask for it," she said. "What you need is board members who have a little bit of a spine, who will say no. The nitwits are the boards of directors who agreed to these things on the way in."

Meanwhile, it's not clear how these executives will collect their money should the company close its doors. It's a key question in the case of financially struggling Webvan and Shaheen.

"I think this is an albatross around everyone's neck, as much around Shaheen as anyone else," Fisher said. "He left a lucrative job and took a chance. He's not the last one to find out it didn't work.

"To be promised an amount of money for the rest of your life is a nice assurance. But on the other hand, he can't rest assured that it's going to be there every year."

The controversy over so-called golden parachutes is not limited to struggling Internet companies. Earlier this month, AT&T came under fire again for its executive compensation, including giving one outgoing executive--who was joining another telecommunications company--stock options valued at more than $1.4 million for work done the previous year. Vice President Dick Cheney got a severance package worth $20 million from Texas oil services company Halliburton when President Bush picked him as his running mate.

The large severance packages have led to shareholder unrest in some cases, said Rosanna Landis Weaver, an analyst with the Investor Responsibility Research Center. This year, severance proposals were the subject of eight votes at companies, and Weaver said she expects that number to go up.

"Shareholders are beginning to look at companies' boards of directors and why they are making decisions," Weaver said. "In some cases, they've seen boards that aren't as independent as they should be."

Then there's still the festering issue of compensation inflation, which leads to the creation of such generous severance payouts because they reflect the value of the person's salary package. U.S. executives are paid much more today than their predecessors or their global counterparts, according to Gary Lutin, who has chaired a series of forums on corporate governance for the New York Society of Security Analysts.

Companies rationalize extraordinary levels of compensation by pointing to the value that executives generate for shareholders, Lutin said. But that does not explain big payouts for executives at struggling companies.

"I don't understand under the circumstances how that theory applies to providing equally extraordinary levels of compensation for having destroyed shareholder value," Lutin said. "Really, it's absurd."