It could go down as the first time in history that someone lost as much as $10 million for using the “F’ word. That is precisely what happened to former Yahoo CEO Carol Bartz after she was fired over the phone by the board last week. In an interview to the Fortune magazine, she referred to the board members as “doofuses” and claimed they had “f****d me over”. The buzz is that Bartz may have violated a non-disparagement clause in her employment contract, on which around $10 million remain outstanding. That clause, if found violated, will allow Yahoo to cancel the payout.
Meanwhile, questions are being raised as to why Yahoo had agreed in the first place on such hefty payouts to Bartz. Opinions vary from “it was a bribe to keep her mouth shut” to the more charitable “divorce alimony”.
While Bartz is unlikely to give in so easily if Yahoo goes ahead with its plan to block her pay, her counterparts in other corporations have been wiser even when removed unceremoniously. Reason: the hefty golden parachute, a clause in the employment contract that promises financial benefits to executives in the event of termination without a cause.
Even as the Bartz controversy was going on, it was disclosed last week that Google’s agreement to buy Motorola Mobility includes a promise of $65.7 million in golden parachute compensation for CEO Sanjay Jha.
Though CEOs are rarely “sacked” in India (most such announcements are couched in euphemisms such as “pursuing other interests” or “to spend more time with my family”), the fact is golden parachutes are increasingly becoming a norm in the country. Ask Wipro’s former co-CEOs, Girish Paranjpe and Suresh Vaswani. Each was richer by Rs 7 crore after they were suddenly asked to go. However, in most cases, the payouts in the event of forced departure in Indian companies are equivalent to 18 months’ pay or transfer of the ownership of the company flat in which one stays.
But this is small change and can be termed humble aspirations if one looks at the examples set by the sacked CEOs of quite a few global corporations.
After stock options, HP’s Mark Hurd left with a package approaching $40 million in 2010 — and that was after the sexual harassment accusations. Carly Fiorina, who was asked by the Hewlett-Packard board to step down in 2005, left with $40 million. There’s more: Angelo Mozilo, former CEO of Countrywide Financial Corp, took home about $44 million on top of the $140 million in Countrywide stock he sold off — even though he put Countrywide at the top of the subprime-mortgage bubble that began to burst in 2007.
These are precisely the reasons golden parachutes have been dubbed shameful, budget-busting payoffs. For instance, shareholders of GlaxoSmithKline had rejected CEO Jean-Pierre Garnier’s golden parachute since they felt that the package, worth a massive $35.7 million should he be sacked before his two-year contract expired, was nothing less than a reward for failure. The package also included a pension plan that would treat Garnier and his wife as though they were three years older than they were. Shareholders felt this was an obscene package since profits under Garnier had fallen by 25 per cent over two and a half years and Glaxo’s record on developing new drugs during his watch was poor.
The public outcry over golden parachutes is often the reason few CEOs are actually fired. HR experts say companies face a strange situation of damned if you do and damned if you don’t. Getting critical talent is impossible these days without sweetening the offer. Moreover, rising shareholder activism prevents them from sacking CEOs, lest they should pay the golden parachute. Forget India Inc, that could be a reason, on average, just two per cent of CEOs of Fortune 500 companies are fired annually.
According to a paper published in the Journal of Finance early this year, Luke Taylor, assistant professor of Finance at the University of Pennsylvania’s Wharton School, cites four reasons boards rarely fire CEOs. First, it takes a CEO at least a year to learn his or her job, and boards are slow learners when it comes to figuring out whether a CEO is any good. Second, firing a CEO involves real costs. Severance alone can run into millions of dollars. Plus, it costs to retain an executive-search firm, hire a new CEO, and even replace other senior managers. Taylor showed that boards tend to believe that sacking a CEO would cost their companies $1.3 billion: $300 million in direct costs and another $1 billion as intangible costs in the form of stress and anxiety caused by firing a CEO.
