Companies Pull Back on CEO 'Failure Parachutes'

By Joann S. Lublin 

Getting ousted from the corner office can be rough, but it long has paid pretty well.

Just ask the former chief executives of Mattel Inc., Symantec Corp., Hertz Global Holdings Inc. and Chesapeake Energy Corp. Pushed out over the past two years, they collected sizable exit packages ranging between $9.7 million and $67 million.

Here's why: Their employers promised sizable sums for their "termination without cause."

Despite investors' growing pique over CEO rewards for poor performance, paying dismissed chiefs remains a common practice. Nearly 60% of publicly held companies in the Fortune 250 have policies or employment agreements to pay cash severance to top bosses ousted this way, concludes an analysis for The Wall Street Journal by compensation researchers Equilar.

"For a CEO, being terminated without cause really means you got fired, and your fellow directors will throw a lot of money at you," said Nell Minow, vice chairman of ValueEdge, a firm that promotes good governance and shareholder rights. The practice shows that a board is weak, she said, adding that for ousted CEOs, "your severance essentially is a failure parachute."

Slowly but surely, that generosity appears to be changing. After facing heat for a fired chief's big payday, certain corporate boards are having second thoughts--and crafting more modest departure deals for new leaders.

"Boards don't want to have severance pay practices that are problematic in the eyes of investors," observed Robin Ferracone, head of Farient Advisors LLC, an executive-pay consultancy.

Businesses typically agree to guarantee severance pay when recruiting new leaders, since such hires want protection for taking on the risky role, said David Rubinsky, an executive-pay specialist at Simpson Thacher & Bartlett LLP.

Employment contracts typically bar exit payments for executives fired "for cause," such as gross misconduct. Firing a leader for cause can be such a legal hassle that boards rarely try, management lawyers and pay advisers say. Termination "without cause" is the simplest--albeit often costly--route.

That is what Mattel directors realized before they forced out Chief Executive Bryan Stockton this year, someone familiar with the toy maker recalled. "It would be virtually impossible to prove cause," the knowledgeable person said. Mr. Stockton left in late January, after a weak holiday season that caused a 59% drop in fourth-quarter profit.

"Our results were not meeting our expectations and the board felt that a leadership change was in order," Mattel spokesman Alex Clark said at the time. Terminated without cause, Mr. Stockton received a $9.7 million package that included nearly $3 million in accelerated vesting of his equity awards.

In March, Mattel said it brought Mr. Stockton back as a consultant for a year--an arrangement not covered in its severance plan. He will earn $1.5 million, 30% more than his 2014 salary. His advice will draw "upon his deep institutional knowledge of the Company and experience in the industry," Mattel's proxy said. Mr. Stockton declined to comment, his spokeswoman said.

Meanwhile, Christopher A. Sinclair, an outside director named Mattel's permanent CEO in April may not be so lucky if the board dismisses him. Mattel's regulatory filing disclosing Mr. Sinclair's pay deal makes no mention whatsoever of a severance arrangement, as normally would be expected. Mr. Sinclair declined to comment.

At Symantec, a $24.3 million exit package for fired chief Stephen M. Bennett last year triggered an investor outcry. The computer-security company synonymous with "antivirus" fired Mr. Bennett amid sagging revenue and a 12-month stock price slump, the second time it dumped a leader in less than two years.

His severance included accelerated vesting for a chunk of shares tied to corporate performance, even though the company failed to achieve the shares' targets during his tenure. Mr. Bennett's payout "goes against the company's own best practices," argued Institutional Shareholder Services, a big proxy-advisory firm, in a report urging shareholders to oppose Symantec's executive-compensation practices at its annual meeting last fall. Nearly 23% of votes cast did so, a strong sign of investor discontent.

Some Symantec directors failed to anticipate the Bennett severance bonanza. "His compensation package was appropriate at the time," a company spokesman explained. Mr. Bennett said he had hoped to not make money unless shareholders made money.

"I didn't spend time thinking about what would happen if the board decided to make a [CEO] change," he said in an email.

Stung by the ISS report, Symantec directors devised a different severance pact for current chief Michael A. Brown. Most of his performance-based shares won't vest early following termination without cause unless he has met targets for earnings and shareholder return, the spokesman added.

After Chesapeake's high-profile ouster of former CEO Aubrey McClendon in 2013, costing the company $67 million, current CEO Doug Lawler stands to get a less-generous severance should he be terminated without cause, according to a person familiar with the situation. Messrs. Lawler and McClendon declined to comment.

When negotiating a CEO contract, directors should consider whether the worst-case scenario "would be embarrassing to the board or unfair to shareholders," suggested Linda Fayne Levinson, chairman of Hertz and its board compensation committee.

Hertz directors may have kept that issue in mind when they negotiated a relatively modest exit package for John P. Tague, hired last November to run the auto-rental concern. He would collect salary and bonus earned through his termination and get accelerated vesting of his equity if he reached their performance targets.

His predecessor, Mark Frissora, pocketed about $10.7 million after Hertz terminated him without cause last fall amid disappointing results and accounting problems. The payment equaled 2.5 times his salary and bonus for 2013 plus $178,047 for his 2014 bonus.

Hertz recently reported a final round of accounting errors, which lowered reported net income by $144 million between 2011 and 2013. Federal regulators are investigating the restatement. The board audit committee criticized Mr. Frissora in a July 19 regulatory filing about the errors. "Our former chief executive officer's management style and temperament created a pressurized operating environment," it said.

Mr. Frissora, who declined to comment, began his new job as CEO of Caesars Entertainment Corp. last month. "Hertz's disclosure very specifically did not suggest any wrongdoing by Mark," a spokeswoman for the casino operator said. "Caesars Entertainment is fortunate to have Mark at its helm."

Write to Joann S. Lublin at [e-mail]

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