Golden Parachutes Leave Investors Fearing Conflict of Interest

Rising change-in-control payments can prompt executives to push for a merger that may not benefit shareholders, critics say.

Executives who negotiate sales of their companies are often pulling the cord on ever-expanding golden parachutes, a compensation trend that irks opponents of outsize CEO pay.

Critics fret that large change-in-control bonuses can encourage executives to make deals that might not be best for shareholders. “It can provide an excessive incentive to enter into a merger,” says Brandon Rees, deputy director of the Office of Investment for the AFL-CIO in Washington. “That much money can be hard to resist.”

One attention-getting payment flowed from April’s $15 billion takeover of Jarden Corp. by fellow U.S. consumer goods conglomerate Newell Rubbermaid. Jarden founder, executive chairman and former CEO Martin Franklin’s golden parachute was worth $180 million, Boca Raton, Florida–based Jarden said in a proxy, most of it stock compensation.

That sum is the largest change-in-control package granted to an executive of a publicly traded U.S. company since at least 2005, according to Equilar, a compensation consulting firm in Redwood City, California. The previous record was the $164.5 million payout to Gillette Co. CEO James Kilts in 2005, Equilar reports.

Jarden wasn’t the only corporation in recent months to handsomely reward an executive who negotiated a merger.

David Pyott, former chief executive of Allergan, was awarded a change-in-control payment worth $126.6 million after Dublin-domiciled Actavis bought his Irvine, California–based pharmaceuticals company for $70.5 billion in March 2015, according to regulatory filings. The golden parachute of Scott McGregor, ex-CEO of semiconductor maker Broadcom Corp., was worth $95 million, according to a proxy filed last September. Singapore- and San Jose, California–headquartered Avago Technologies closed its $37 billion purchase of Irvine, California–based Broadcom in February.


Companies consider golden parachutes a reward for a job well done. At Jarden, for instance, the share price soared during Franklin’s tenure. Adjusted for splits, the company’s stock was trading at less than $2 when he took over as chairman and CEO in 2001. The merger with Atlanta-based Newell Rubbermaid valued Jarden at $60 per share, a 24 percent premium over its 30-day average price as of December 11.

Change-in-control packages are designed to push CEOs to do right by shareholders. If a chief executive arranges a merger only to lose his job, the thinking goes, he might never entertain a buyout bid. And shareholders can reject a merger if they deem a golden parachute excessive, although such a no vote has yet to occur.

But compensation watchdogs say the packages have grown so lucrative that they could skew the decisions made by executives negotiating mergers.

“Golden parachutes have long been a thorn in the side of shareholders and employees,” the AFL-CIO’s Rees says. “It’s basically a transfer of value to executives.”

Despite increased scrutiny from investors and the media, change-in-control packages remain generous. For executives at the 200 biggest U.S. companies, the average total value of a golden parachute was $30.3 million in 2015, up slightly from $29.9 million in 2013, according to New York–based professional services firm Alvarez & Marsal.

Although companies have placed caps on the salary and bonus portions of change-in-control packages, stock compensation accounts for the lion’s share of the rich payouts. In the case of Jarden, Franklin’s golden parachute included $150 million in stock-related payments.

“Companies are setting limits on the golden parachutes,” says Paul Hodgson, a principal at South Portland, Maine–based consulting firm BHJ Partners. “But it seems to me the outcome is the same.”

Jarden informed shareholders of the golden parachutes related to its tie-up with Newell Rubbermaid in a March proxy, noting that president Ian Ashken was promised $84.9 million and CEO James Lillie would receive $84.3 million. In all, change-in-control payments to Jarden’s top six executives totaled nearly $400 million, a sum so lavish that the company issued a warning to shareholders.

“Jarden stockholders should be aware and take into account the fact that certain Jarden directors and executive officers have interests in the merger transactions that may be different from, or in addition to, the interests of Jarden stockholders generally and that may create potential conflicts of interest,” the corporation said in its proxy.

Despite that admonition, shareholders ended up voting in favor of the merger, which resulted in a combined company called Newell Brands. But Jarden’s change-in-control packages raised another thorny issue: They allowed executives to cash in stock awards that, without a merger, would have been granted only if the company were to achieve ambitious financial goals.

Investors such as the $187 billion California State Teachers’ Retirement System cast a skeptical eye on accelerated stock grants. “CalSTRS supports golden parachutes that are not excessive in absolute amount or relative to the total transaction value and do not include auto-acceleration of unvested equity awards,” says spokesman Ricardo Duran, referring to golden parachutes in general and not to Jarden’s payouts in particular.

Franklin’s golden parachute included other perks, such as the right to buy a company plane for a $5 million discount and a Jarden-owned property in Aspen, Colorado, for $2.9 million. Such benefits should make shareholders wary of efforts to pad change-in-control compensation, the AFL-CIO’s Rees says: “It’s almost an admission that these perks weren’t necessary in the first place, and they were just there to feather the executive’s nest.”

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