The US may have eye-watering levels of executive pay but investors are also growing increasingly concerned about the size of “golden parachutes”—payments made to departing CEOs following a “sudden exit”.
Figures from proxy adviser ISS show the number of shareholder proposals demanding a vote on severance package—what ISS dubs a “new spin” on say-on-pay—has more than doubled, year-on-year.
An article by Subodh Mishra, head of communications at ISS, says: “Golden parachutes cushion corporate leaders from the financial risks of a sudden exit by promising substantial severance packages, particularly where there is a change in control.
“From the shareholder perspective, though, they are costly outlays that fail to pay for performance. With challenging macroeconomic factors and recession worries top of mind in the last several years, shareholders and corporate governance advocates are showing increased interest in curbing excessive CEO and executive financial windfalls upon termination.”
This year’s concern
Figures show that since January 2020, there have been 61 shareholder proposals concerned about golden parachutes, with 41 of those in 2023 alone.
Research by ISS reveals that the average golden parachute has dropped in value from an average of $13.1m in 2022 to $10.3m in the last year.
ISS says many of the shareholder concerns stem from golden parachutes that follow mergers and takeovers.
Proposals argue that managers should remain focused on “performance” instead of pursuing “business combinations that would not be well aligned, resulting in costly termination packages”.
If the US economy worsens, there is concern that there may be more parachutes on the way.
High-profile examples include three Twitter executives who attracted headlines around the world when it was revealed that together they would receive $122m in “separation payments”.
Flight risk
Alaska Air saw so much dissent from shareholders over golden parachutes that its board agreed a policy that “requires shareholder ratification for new or renewed severance agreements” if their value topped 2.99 times the sum of an executive’s salary plus bonus.
Another company, Spirit AeroSystems, put in place a policy that shareholders have to approve cash severances worth more than the 2.99 times.
In the UK, severance payments often make news, too. The most recent to cause headlines was that given to NatWest Group CEO Alison Rose, who left the bank after revealing information about client Nigel Farage to a journalist.
Rose was recently told she would not receive almost £7.6m of her potential payment because she did not meet the terms of “good leaver” status under her contract.
The UK debate often comes under the term “rewards for failure”, though it is bound up in a general debate about executive pay. A new version of the UK’s corporate governance code, due to be published in January, could strengthen oversight of executive pay with demands for more reporting on “malus and claw back”, provisions that allow companies to cut or reclaim bonuses if performance falls short or companies are forced to reastate their results.
Mishra concludes that time will tell if “say on golden parachutes” will gain momentum in the US. “Either way,” he adds, “attention on the topic now suggests that it is an important compensation and shareholder rights issue that is meant to ensure that corporate managements are properly and prudently incentivised to run successful companies for the long term—paid fairly for true performance, but not overcompensated for exit strategies.”