Bloomberg Businessweek
Golden Hellos, the Latest CEO Compensation Practice to Come Under Fire
For years corporate boards have used so-called golden handcuffs (retention
incentives) to keep treasured chief executive officers in the fold or provided
golden parachutes (severance packages) to ease their departures. Lately, another
gilded pay practice has taken hold: golden hellos, or multimillion-dollar
signing bonuses used to get CEO candidates to join the team. The number of U.S.
companies in the Russell 3000 Index and Canadian ones in the S&P/TSX 60
Index making upfront payments to executives has risen to more than 70 this year,
from 41 in all of 2012, according to governance advisory firm GMI Ratings. Among
this yearfs biggest: Zyngafs (ZNGA) $45 million package to attract game
industry veteran Don Mattrick.
Yet high-profile flameouts such as Ron Johnson show that such tactics can
quickly lose their glitter—at least for shareholders. J. C. Penney (JCP) fired CEO Johnson in April, 17 months
after giving him a signing bonus of $52.7 million in shares to recruit him
from Apple (AAPL). gInvestors should be skeptical of golden
hellos, which represent pay decoupled from performance and provide no retention
incentives,h says Lucian Bebchuk, a Harvard Law School professor who has studied
CEO pay.
Some welcome payments can yield disappointing returns: J. C. Penney shares
slumped 50 percent during Johnsonfs reign, while Hewlett-Packardfs (HPQ) dropped 46 percent under Léo Apotheker,
ousted in 2011 just 10 months after getting $8.6 million in a signing
bonus and relocation benefits. In total, he was entitled to $34.7 million
in cash and stock for less than one yearfs work.
Some directors agree front-loading such largesse is bad governance. gThe
incentive should be they will come to the company and perform and be rewarded,h
says Jon Luther, chairman of Arbyfs Restaurant Group, a director at Six
Flags Entertainment (SIX) and Brinker International (EAT), and former CEO of Dunkinf Brands (DNKN). Candidates for high-level positions who
asked for signing bonuses where hefs been a board member have been rejected in
favor of those who didnft, he says, declining to identify the companies and
candidates. Luther says he never asked for a bonus to take a job and was never
offered one: gI said Ifll get it done, and you can take care of me when I
succeed.h
Golden hellos are often a sign of other compensation dysfunctions, says Greg
Ruel, a GMI senior research analyst. On average, companies dinged by GMI for
giving out big upfront payments also have received grades of D for their overall
pay practices. Chesapeake Energy (CHK) and Best Buy (BBY), two that have been flagged by GMI for
offering golden hellos, also in recent years lost so-called say-on-pay votes,
nonbinding stockholder polls on pay plans granted by their boards. Those ballots
were evidence of shareholder dissatisfaction—and ultimately prompted changes in
the companiesf compensation practices.
In April, the same month as Johnsonfs ouster, golden hellos again were thrust
into the spotlight, this time at Toronto-based Barrick Gold (ABX). Dissenting investors, including Canadafs six
largest pension funds, opposed an $11.9 million cash welcome package to
Co-Chairman John Thornton, a former Goldman Sachs (GS) president. (Although the bonus wasnft rolled
back, Barrick did adopt other governance changes.) gThis is the kind of
situation where you are not getting anything in advance, but yet you have to pay
upfront for the hopes and the aspirations of what will be delivered down the
road,h says Robert Gill, a Toronto-based fund manager at Aston Hill Financial (AHF:CN), which manages $7.6 billion in
assets, including Barrick shares. gWe donft think thatfs commensurate with how
the industry should remunerate people.h
GMI decided to include golden hellos in its rating system in April because of
evidence the bonuses were getting bigger, Ruel says. The payouts have risen even
as CEO turnover last year fell to the lowest level since at least 2004.
Companies often justify golden hellos by saying they compensate for pay that
new CEOs had to forgo for leaving their previous employers. Such payments partly
explain why hiring an outside CEO costs about one-third more than promoting from
within, says Chris McGoldrick, a senior research analyst at compensation tracker
Equilar. Board compensation committees may have to consider that as they search
to fill CEO vacancies at Microsoft (MSFT), Lululemon Athletica (LULU), and J. C. Penney, which is seeking a
replacement for its interim CEO. Last year about 26 percent of new S&P
500 CEOs were hired from outside the company, according to executive recruiter
Spencer Stuart.
gThe board has to decide if they want to pay the freight to move the CEO from
one job to another,h says David Larcker, a Stanford Graduate School of Business
professor who has done research on executive compensation. gItfs up to the board
to make sure itfs good for shareholders. I consider a request for cash a red
flag, though.h
Barrick Chairman Peter Munk told investors who opposed Thorntonfs bonus at an
April shareholdersf meeting that he needed the former banker, ga highly
desirable, well-known commodity,h to secure access to governments and protect
against possible losses of mineral rights. Some investors arenft so sure. Says
Aston Hillfs Gill: gI do realize Thornton has a big name, but now he really has
to deliver.h In an e-mail, Barrick spokesman Andy Lloyd said the gold producerfs
board is in the process of strengthening governance practices through the
addition of independent directors and improvements to executive
compensation.
At J. C. Penney, Johnson got his November 2011 signing bonus in
restricted stock to make up for the compensation he had to forfeit at Apple,
where hefd led retail operations. Johnson couldnft be reached for comment.
Kristin Hays, a J. C. Penney spokeswoman, declined to comment.
Sometimes golden hellos do pay off for investors. Best Buyfs shares have more
than doubled since the consumer electronics retailer lured former hospitality
and video game executive Hubert Joly to be its CEO in 2012 with a welcome
package that included a $3.5 million cash bonus and equity grants and
options valued at almost $13 million. For Zynga, a social gaming pioneer
whose games have faded in popularity, itfs too soon to tell whether shareholders
will benefit from Mattrickfs hiring. Although the stock has risen since the
former Microsoft president of interactive entertainment arrived in July and
began cutting expenses and engineering a restructuring, it still trades at less
than half its 2011 initial public offering price. Dani Dudeck, a Zynga
spokeswoman, declined to comment.
Some management experts say directors must try harder to compare potential
CEOsf relative value. gThe board has to be careful not to fall in love with any
one candidate,h says James Post, a governance and ethics professor at Boston
University School of Management. gYou have to look for a good candidate at a
good price, not a good candidate at any price.h
The bottom line: The number of companies granting CEO
signing bonuses is up more than 70 percent so far in 2013 from last
year.
Green
is Detroit bureau chief for Bloomberg News.
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