Time for an assault on golden parachutes

It’s time for all investors, institutional and individual, to tell boards of directors: “We’re mad as hell, and we’re not going to take it anymore!” That is, investors must make boards understand they will no longer pay failed executives outrageous severance packages.

And they must let the Securities and Exchange Commission hear it too. Unfortunately, the SEC last week voted down a proposed proxy-rules change that would have made it possible for shareholders to apply meaningful pressure on directors to hold them accountable.

SEC Chairman Christopher Cox has promised to revisit the issue next year when new Democratic commissioners may make a change possible.

It’s evident that investors are weary of paying chief executives millions of dollars a year for mediocre (at best) performance and rewarding with multimillion-dollar severance packages those who fail and cost the companies and shareholders billions.

While one board, that of Merrill Lynch & Co. Inc. in New York, seems to have received the message, many others may need two-by-fours across the forehead to get their attention.

The Merrill Lynch board paid a high price in hiring John Thain as chief executive but tied most of the package to performance and promised no severance or pension benefits.

His contract will pay him $750,000 a year, and he will receive 500,000 shares of restricted stock — worth, when he was hired, $28 million — and a bonus this year of $15 million. Mr. Thain also will receive 1.8 million Merrill Lynch options.

Thus he will become even richer if he sorts out the company’s problems, and shareholders will benefit too. But if Mr. Thain fails to lift Merrill Lynch out of the dumps, he will not prosper while the shareholders suffer.

The Thain package is not perfect; his restricted stock and options will increase in value even if Merrill merely keeps pace with a rising market.

Nevertheless, it is preferable by far to the packages paid to those who falter, such as Merrill Lynch’s E. Stanley O’Neal and New York-based Citigroup Inc.’s Charles Prince.

The failed executives may argue that large parts of their severance packages are deferred compensation — that is, money already earned.

Shareholders can respond thus: “Since you have demolished the stock price, you haven’t earned it. You should forfeit it.”

Mr. Thain’s contract is a first model that should be improved upon by other boards. For example, incentive compensation should be tied not to stock performance on par with that of the market but to better-than-peer performance.

Also, if earnings-per-share growth is used as a measure for an annual bonus, it must be adjusted for share buybacks, which are an easy way for CEOs to boost earnings per share.

Investors also must hold boards accountable for ensuring that the CEOs are preparing their successors. Training a successor is a key responsibility that too many CEOs ignore. Hiring an outsider as CEO is evidence that the former CEO failed in their duty to train a successor.

Studies show that outside successors cost far more than promoting from within. Perhaps board member compensation should also be tied to corporate performance — a proposal no board would adopt without significant outside pressure.