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Note to any of you CEOs out there who are negotiating departure packages: Make sure your options aren't mostly underwater before you exit the building.
Charles Prince, who on Nov. 4 announced he'll be leaving his post as chief executive of Citigroup (C, news, msgs) after saying the bank would need an additional $8 billion to $11 billion in subprime-mortgage-related write-downs, will be leaving with a pension, stock awards and stock options worth a total of $29.5 million, according to a regulatory filing. He's entitled to a year-end bonus currently valued at about $12 million. He also gets an office, a car and a driver for five years.
Citigroup will pay Prince no severance.
That's far less than others. Take rival chief executive Stanley O'Neal, who "retired" from Merrill Lynch (MER, news, msgs) last month after a similar blowup there, though with a hefty $160 million paycheck, most of it accumulated in an employee pension plan that is available to many other Merrill employees. That includes $30 million in retirement benefits and $129 million in stock and option holdings.
Prince, in contrast, had a very small $1.7 million pension, while much of his pay over 29 years at the company has come in the form of stock-option grants, and the majority of those have strike prices that are above the current stock price, meaning they are worthless for now.
That could certainly change, however. The beauty of this scenario, at least as far as Prince is concerned, is that a new chief executive could come in and clean up the place and send the stock price soaring, enabling Prince and other ousted executives to cash in on their option grants before the deadline two years from now.
Academics from Northwestern University's Kellogg School of Management researched the subject of severance and concluded in September that it can be an incentive for risk-taking. The value of employee stock options "increases when companies' stocks are more likely to move significantly higher," wrote Thomas Lys, Tjomme Rusticus and Ewa Sletten. "The expected value of severance pay, on the other hand, increases when companies' stocks are more likely to fall and CEOs are more likely to lose their positions."
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System encourages risk-taking
The pattern is not unique to this decade. In the late years of the go-go 1990s, several financial chief executives raised eyebrows for taking away huge severance packages after driving their companies into the ground on risky strategies.Stephen Hilbert of Conseco (CNO, news, msgs), for example, took home an estimated $72 million even though the value of the company's stock during his tenure sank from $57 to $5 a share and the company ultimately ended up bankrupt. Conseco's misstep, on Hilbert's watch, was buying home-finance company Greenpoint Financial just before the last great subprime-lending blowup.
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Then there was Frank Newman, the chief executive of Bankers Trust, whose aggressive push into technology banking and lending, coupled with an unfortunately large position in Russian government bonds in the summer of 1998, brought the investment bank to the brink before being rescued in an acquisition by Deutsche Bank (DB, news, msgs). He walked away with $55 million.
| Executive | Company | Walk-away pay |
|---|---|---|
| Stanley O'Neal | Merrill Lynch | $160 million |
| Philip Purcell | Morgan Stanley | $43.9 million |
| Richard Grasso | New York Stock Exchange | $140 million |
| Douglas Ivester | Coca-Cola | $120 million |
| Robert Nardelli | Home Depot | $210 million |
| The rest of the list |
Philip Purcell left Morgan Stanley (MS, news, msgs) after a shareholder revolt against him in 2005, and took with him $43.9 million plus $250,000 a year for life.
And the winner is . . .
Richard Grasso, who headed up the New York Stock Exchange, took $140 million in deferred compensation and the disclosure of that payment sparked a furor that led to his departure. The pay also provoked an investigation and lawsuits, which are still being worked out. Grasso has vowed to fight.Douglas Ivester of Coca-Cola (KO, news, msgs) took $120 million when he stepped down in 2000 in his mid-50s. The departure was deemed a "retirement," but Ivester had presided over a period of stagnant growth, declining earnings and bad publicity.
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The big winner in the severance derby: Robert Nardelli, who walked away from Home Depot (HD, news, msgs) with $210 million. He fixed up the home-products retailer using techniques he learned as an executive at General Electric (GE, news, msgs), but by 2006, he was starting to seriously irritate shareholders. The final straw was when he told the board to skip the annual shareholder meeting and prevented shareholders from speaking for more than a few minutes. He was ousted in January 2007.
This article was reported and written by Liz Moyer for Forbes.com.
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