golden parachutes cost investors dear
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Patrick Hosking Financial EditorJanuary 13 2011 7:12PM
Chief executives with over-generous severance pay arrangements sell out significantlymore cheaply when weighing up a takeover bid, an academic study has found.
Company bosses with so-called golden parachutes that are 10 per cent more generousthan the average agreed to sell their companies for a 5 per cent smaller takeoverpremium.
The shortfall amounted to an average of $249 million in 851 American takeover bidsanalysed by Cass Business School and the LeBow College of Business in Philadelphia.
Anh Tran of Cass said: “Our results show that as CEOs become more insulated frompersonal losses due to relatively larger parachutes, shareholders obtain less favourableacquisition terms.
“This suggests that larger parachutes induce some CEOs to sacrifice the interests ofshareholders in pursuit of their own personal gain.”
The “self-serving” attitude of company chiefs was costing shareholders of US companiesdear, Dr Tran said, though there was no evidence as to whether a similar trend existed inthe UK.
Severance terms in the US are comparatively generous to begin with, with ousted chiefexecutives typically receiving packages of two or three times base pay plus bonus.
Stan O’Neal, who led Merrill Lynch to catastrophe, walked away with $161.5 million,while Citigroup boss Chuck Prince received $42 million. Bob Nardelli of Home Depot leftwith $210 million when forced out by disappointed shareholders.
Severance terms in the UK are usually more modest, after the ending of three-yearrolling contracts, once the norm. But perks such as being able to take early retirementwith no penalty can be extremely valuable.
Sir Fred Goodwin’s severance deal from Royal Bank of Scotland enabled him to doublehis pension value to £17 million, although he later agreed to forgo part of the extrabenefit.
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