Sharper Image found itself in a distinguished spot recently when the board of the troubled retailer did what most of its counterparts in corporate America have failed to do: It cut its former CEO’s severance package.
In an era where bloated payouts are the norm — like the $210 million that Home Depot Inc.’s Robert Nardelli is expected to get after resigning from the home improvement retailer — few companies are willing to slash the money that they had promised to pay executives when they depart, or in some cases, are shown the door.
Some of that has to do with ironclad employment contracts that make it hard to recoup a dime. But corporate boards are also to blame for not even trying to negotiate lower payouts when executives’ performance disappoints.
Such fat severance agreements are known as “golden parachutes” because they often lavish executives with millions of dollars in cash, pension benefits and perks — from access to corporate jets to dry cleaning services to company cars — upon their departure.
Part of the problem is that the severance deals are made when the executives are being wooed to take the helm.
“It’s the ’holy-cow’ process,” explains Patrick McGurn, executive vice president at the proxy advisory firm Institutional Shareholder Services, who says that boards become so enamored with “can’t-miss” executives that they overpromise just to make the hire.
Unfortunately, many boards don’t consider what happens when the honeymoon ends. What if the executive doesn’t perform as expected? What happens if business crumbles? What happens if the stock price lags?
The way most severance agreements are written, many companies have to pay up unless they can prove an executive deserved to be fired for “cause.” That generally means they’ve broken the law.
It is much more difficult to backtrack if performance is the issue. But it is not impossible, according to compensation experts who say companies have some leverage with executives who are departing for such reasons.
The trouble is that most boards shy away from such battles. That’s largely because they worry it could set off costly legal fights and keep the companies’ troubles in the headlines.
“A lot of companies think it is just easier to pay the severance,” said Jay Warren, counsel in the labor and employment practice at the law firm Bryan Cave. “They want to deal with the bad news and move on.”
That’s why Sharper Image Corp.’s announcement is worth noting. The San Francisco-based specialty retailer chopped more than $3 million from the severance packages of Richard Thalheimer, who had founded the company in 1977 and left his post as CEO in September amid questions regarding the timing of certain stock-option grants.
Sharper Image said in a Dec. 29 securities filing that Thalheimer’s severance would be $1.78 million — well below the $5 million minimum that had been guaranteed to him under a contract signed in 2002. He also will get $3.9 million in retirement benefits.
The reduction in severance comes amid slumping sales and profits at the retail chain best known for its electronic gadgets. Its shares now trade around $10 each, just about a quarter of what they were in the winter of 2004.
The company is also investigating the timing of its past stock-option grants. In its securities filing, Sharper Image said that the severance paid accounted for “certain amounts” of options to Thalheimer that had been “granted to him at exercise prices that were below the fair-market value of the company’s stock on the day of the grant.”
It was a proactive move by Sharper Image, one that many of the dozens of other companies caught in the stock-option “backdating” mess haven’t done.
Included on that list is KB Home, which is also investigating its stock-option grants. That led to departure of CEO Bruce Karatz in November and his repayment of $13 million to the Los Angeles-based home builder.
But Karatz is still entitled to a severance pay equal to the average of what he earned in salary and incentives over the last three years — which could top $70 million, according to securities filings. He also could get just over $1 million a year for up to 25 years from the contract provision that gives him an annual pension equal to his average base salary over this final three years of employment.
KB Home did not return calls from The Associated Press requesting comment on the status of his severance.
At Home Depot, Nardelli’s pay had been the ire of shareholders. They watched their shares fall more than 3 percent on a split-adjusted basis since Nardelli took over in December 2000, even as he earned $123.7 million in compensation excluding certain stock option grants through the end of 2005. His compensation for 2006 has not yet been disclosed.
The board had the chance last year to renegotiate his employment contract, which included the generous severance provision, but compensation experts said it choose to not proceed.
As shareholder anger over his pay intensified last summer, the board’s compensation committee attempted to scale some of his pay and perks back, asking him to come up with potential concessions, according to The Wall Street Journal.
The effort didn’t get anywhere. Instead of cutting his pay, he resigned from the Atlanta-based company in a surprise move right after the start of the new year. And with him will go $210 million in severance.