Shyamal Majumdar: The financial soft landing

THE HUMAN FACTOR

When the Jumbo Group, the holding company of Shaw Wallace, decided to pay the liquor company's top brass their salaries for six months to one year after the completion of the takeover by the UB Group, it was essentially taking a leaf out of corporate America's books.

The trend is catching up in India though unlike their US counterparts, India Inc is cagey in going public about it. Termed Golden Parachute, the scheme basically ensures a financial soft landing if a merger or acquisition results in loss of jobs.

The generous benefits may include substantial severance pay, a one-time bonus payment when employment ends, or stock options. But top Indian executives have often gone beyond the predictable.

Take the example of the CEO of a Delhi-based information technology company. Before joining, he ensured that the ownership of the luxurious house that the company gave him would automatically shift to his name after six years.

The agreement specifically mentioned that the contract would hold good even if the IT firm's ownership changed.

There's more. A chief operating officer (COO) of an Ahmedabad-based pharmaceutical major made sure in his appointment contract that the company takes care of the tax liability of his considerable severance package in the event of a takeover.

Known as "gross-ups," these are added payments that cover the taxes levied on an executive whose golden parachute opens in the wake of an M&A.

The COO may have borrowed the idea from a study of 350 large publicly traded companies in the US. The study, conducted by HR consultant Mercer, found that 64 per cent of those with golden parachutes now offer gross-up payments.

There are several reasons why golden parachutes are used. Some argue that such M&A-related payouts to top executives are inevitable since there is a relatively limited group of people with the skill set to do certain jobs.

In this view, any company that fails to offer a new CEO a handsome compensation agreement, with a parachute, is doing a poor job for its shareholders.

Sometimes the parachutes are used as safeguard against a possible takeover attempt. For instance, faced with a takeover threat from Royal Philips Electronics, the US-based VLSI Technology gave generous financial benefits to 27 of its top executives.

The "parachute" included lump sum payments that was twice the executive's annual base salary, post-retirement medical benefits and so on.

This was done to ensure three things: one, there was no buy-in for the takeover among the key executives, thus preventing possible leakage of information; two, the takeover itself became that much costlier as the acquirer had to shell out extra money to pay them off.

And three, it helped VLSI attract and retain a qualified management team that acted in the best financial interests of shareholders, even under the threat of a takeover.

An HR consultant says one of the unstated reasons for giving a golden parachute is that the top executive is allowed to smile all the way to the bank to ensure that he doesn't talk about the actual reason for his departure.

Despite some benefits, golden parachutes have been termed by many as shameful, budget-busting payoffs. For instance, shareholders of GlaxoSmithKilne had rejected chief executive Jean-Pierre Garnier's golden parachute as they felt that the package, estimated to be worth a massive $35.7 million, should he be sacked before the term of his two-year contract expires, 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 really were.

Shareholders felt this was an obscene package as profits under Garnier had fallen by 25 per cent to £4.5 billion over two-and-a-half years and Glaxo had a poor record in developing new drugs during his watch.

Sometimes, golden parachutes can be really over the top. When his firm was bought out by Aetna in 1996, US HealthCare Chair Leonard Abramson stayed on as business and public relations adviser for $2 million a year plus benefits.

In addition, he got a gift of a $25 million airplane and was paid up to $2 million a year to operate it.

Finally, don't lose heart if you are not in the top executive bracket as yet and thus not eligible for a golden parachute. The good news is that faced with a talent shortage, companies are also looking at silver (for mid-level executives) and even tin (for juniors) parachutes.