Will Golden Parachutes Ever Pop?

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Over-the-top executive exit packages are bad for business, but they’ll continue to balloon unless shareholders and consumers decide to rally against them.

By Rick Paulas


(Photo: josephgruber/Flickr)

When Jeff Smisek, CEO of United Airlines, was forced to step down for his role in the New Jersey Bridgegate scandal, he left with a bonus of “$4.9 million in cash, $3.4 million in stock, free flights and parking for life, and more.” When Roger Ailes, CEO of Fox News, was forced out after a flood of sexual harassment claims following Gretchen Carlson’s lawsuit, he left with a cool $60 million. If Marissa Mayer ends up stepping down as Yahoo’s CEO once its merger with Verizon goes through, as she’s expected to do, she’ll take $54.89 million wherever she goes.

Some of these examples, and many more, are recounted in Peer Fiss’ Harvard Business Review piece “A Short History of Golden Parachutes.”

This practice is, without a doubt, the sweetest deal in the corporate world. Get ousted from your job — either because the company is merging with another, or because you’ve done a terrible job — and, on your way out, you get heaps of money.

But, as Fiss has explained, the golden parachute didn’t start out this way.

Since 2000, 21 CEOs have left their companies with golden parachutes in excess of $100 million.

In 1961, the creditors of TWA Airlines were trying to find a chairman to clean up the mess left behind by Howard Hughes. The problem was, it was tough to get someone qualified to take the gig, as the legal status of the airline was murky. To help lure a top executive, creditors added a payoff to the newly hired employee in the event that the company dissolved. Whatever was in there was good enough for Charles Tillinghast Jr., who signed on and proceeded to lift TWA out of collapse, turning a $50 million profit in 1965.

The precedent had been set. From there, exit packages remained modest enough to escape scrutiny until the era of corporate hostile takeovers in the 1980s, when mergers and acquisitions became the new norm. “It was insurance,” says Fiss, a professor of management at University of Southern California’s Marshall School of Business. “If you can’t protect my job, at least protect my wallet.”

But constant turnover meant incoming executives wanted more guarantees, and with standard market one-upmanship at play, parachutes ballooned. “By 1986,” according to Fiss, “a third of the largest 250 American corporations” had golden parachute arrangements for executives. That number has only risen. Since 2000, 21 CEOs have left their companies with golden parachutes in excess of $100 million. Lucrative exit packages have not only come to be expected, but seen as the cost of doing business for new CEO hires.

“It’s become a situation where you have to pay them off basically to do what’s right for the shareholders,” Fiss says. “You might say, these people are getting paid in the first place, why do we have to pay additional funds for them to do their job?”

A more crucial question is whether or not the usage of golden parachutes has a positive effect on corporate profits. According to a 2013 study of 851 mergers between 1999 and 2007, golden parachutes were “negatively associated with acquisition premium.” That means CEOs with golden parachutes made worse deals than those who didn’t have exit compensation built into their contracts. A 2014 study suggested that managers with golden parachutes may be harder to get rid of, because the parachutes are “weakening the force of the market for control and thereby increasing managerial slack.”

The only people winning in the world of luxurious exit packages, it seems, are those getting the exit packages.

There have been a few attempts to limit compensation size over the years, but they’ve been ineffective. In 1984, Congress passed a law eliminating tax deductibility for exit packages in excess of triple the executive’s salary. That effort essentially failed when golden parachutes simply fell to 2.99 times the executive’s salary, Fiss wrote. In 1993, Congress went a step further, making only $1 million of an executive’s salary tax deductible, but that just increased perks like accelerated stock options, lifetime dental coverage, and even usage of private helicopters. A part of 2011’s Dodd-Frank Act required golden parachutes to go in front of a shareholder vote; disapproval votes for executive compensation are rare, and even then, non-binding.

With no forceful Congressional action on the matter, the golden parachute has become a self-propelling phenomenon. “When they’re hiring, they say, here are comparable CEOs, here’s what they’re being paid, and we have an above-average CEO, so we have to pay more,” Fiss says. “But because everybody thinks [their CEO] is above-average, compensation creeps up over time.” Until enough shareholders decide they’re not getting much value out of these packages, the trend will likely continue.

“Public outrage can, in an age of social media, have a much more direct effect,” Fiss says. “I think this is up to shareholders, and us, the consumers.”