I don’t hate successful people.
I’m not envious of their wealth.
But I do care about fairness and justice.
Yes, I know: Life isn’t fair, and there is no justice in the world. However, it doesn’t always have to be that way.
For example, we don’t have to live in a world where a cashier at CVS earns an average of $8.34 while if he were fired, CVS’s CEO, Larry Merlo would be eligible for a severance package worth $170 million.
That is a system that is out of whack. That is a system we need to work to change.
The GMI blog reports on the cost the nation’s top companies would incur to get rid of a CEO. Are these executives really worth it, or is the system way too rigged in their favor?
Read Nathaniel Parish Flannery’s report and decide for yourself:
What is the price of failure? With 14 million Americans unemployed, more people are paying attention to CEO pay packages. The unemployment rate has been over 9% since April 2009, but CEOs continue to collect multi-million dollar payouts, even as their companies deliver lack-luster returns to shareholders.
Even though many investors are frustrated with executive pay packages, firing CEOs can be an expensive option.
For example, when executives at Hewlett-Packard, Bank of New York Mellon, Burger King and Yahoo were asked to step down this year, they walked away with severance packages that cost shareholders a combined $60 million. For instance, when Léo Apotheker stepped down as CEO at Hewlett-Packard, he walked away with $13.2 million in cash and stock severance.
According to data from GMI, the corporate governance research firm, more than a quarter of the companies in the S&P 500 reported declining income or net losses last year. It would cost a fortune, however, to fire these companies’ CEOs. GMI data shows that executives at these struggling companies are in line to receive severance payments worth $2.6 billion. More broadly, in the S&P 500, CEOs are entitled to receive an average of $22 million in the event they are fired. In total, it would cost shareholders $10.8 billion to fire the CEOs of all of the companies in the S&P 500.
CVS’s CEO, Larry Merlo, will be well cared for if he’s ever fired; he’s eligible for a severance package worth $170 million. Likewise, Ralph Lauren the founder and CEO of the Ralph Lauren Corporation would still be living in style if he were asked to step down; he’s eligible for a severance payout worth $148 million.
CVS, The Chubb Corporation, Lockheed Martin, Comcast, and Verizon all reported declining net incomes or losses last year, and yet their shareholders would be on the line for almost half a billion dollars in severance packages if they moved to fire these companies’ CEOs.
Severance packages for under-performing CEOs reflect a broader trend in the U.S. economy. Currently the richest 1% of households earns as much as the bottom 60% and possesses as much wealth as the bottom 90% of Americans put together. One tenth of U.S. workers are currently unemployed and almost half of these people have been unemployed for six months or more. Ben Bernanke, the Chairman of the U.S. Federal Reserve, recently said, “this unemployment situation we have is really a national crisis.”
If shareholders want to take action on executive compensation, they should make sure that executives’ interests are aligned with their own, they should look for bonus schemes that link payout to targets for metrics like Total Shareholder Returns. In the wake of the financial crisis, U.S. legislators have already acted to implement new rules regarding so-called “golden parachute” payments for departing executives. These rules however, apply to cash payments only, and not to stock-linked compensation. As the most recent data show, the new rules have done little to clamp down on excessive CEO severance packages.
On both sides of the political spectrum, Americans are speaking out about what they see as an uneven playing field emerging in the U.S. economy. Executives at publicly listed companies should be aware that if they fail to align pay policies with performance, regulators might be inclined to intervene to change the rules of the game.
After all, Lloyd Doggett, a Democratic representative of Texas and senior member of the House Ways and Means Committee, recently called outsized severance packages for executives “outrageous.”
“The whole concept that the only way to get rid of bad management is to buy them off is fundamentally wrong” he said.