Sunday, December 11, 2011

CEO Severance Packages Worsen Peformance

CEO Golden Parachutes, multimillion dollar severance packages, are associated with poorer corporate performance, according to a Tulane University study.  Chief reported:

After putting a severance agreement in place, on average, companies underperformed the markets by 1.6 percent.  And companies whose agreement was cash-only underperformed the markets by 4 percent.

56 percent of S&P 500 companies offer severance packages.
Over half with severance packages is interesting in light of CEOs populating one another's board of directors.  Tulane Finance Professor Peggy Huang conducted the study after seeing a 175% rise in the use of CEO severance packages

1993 - 20% of firms offered golden parachutes
2007 - 55%gave severance packages

Professor Huang suggested switching from cash severance to packages with stock and options substantially represented.  Huang believes this aligns the CEO with the interests of the firm.  Following her research, that would move a firm from 4% to 1.6% under performance. 

There is another problem with her recommendation.  Did Huang forget the CEO stock option backdating scandal which ran from the early "90's to to 2004?  CEOs cheated on a widespread basis, as 29.2% of 7,774 companies engaged in
"timing manipulation" for executive stock option grants.  

CEO pay exploded in 2007.   CEO pay in 2010 rose mightily for most chief executives rom 2009. The WSJ conducts an annual study of CEO compensation, with the latest covering 2010.

Consider my CEO compensation comment from September 2007:

Free markets have American businessmen, who fund U.S. politicians, all pursuing the lowest common denominator (on worker pay/benefits), with the main exceptions CEO pay and investment manager's (PEU) compensation.

This was a six months before Carlyle Capital Corporation defaulted and a year prior to Lehman Brothers implosion.  Since then American branded banksters got their compensation back on track.  CEO severance pay evolved into the platinum kiss when packages rose to over $100 million.  The meanness and greed club looks after itself.

Update 12-15-11:  CEO pay soared in 2010.

Update 12-26-11:  Benefit cuts since 2007