KEY POINTS:
How does a severance payment of over $1 million sound?
Recent media reports refer to a claim by the founder of finance company Bridgecorp that receivers owe him a "golden handshake", or golden parachute as it is more commonly known, worth more than $1
million.
Sometimes these sorts of payments are agreed in advance (as appeared to be the argument in the Bridgecorp case), so the company is obliged to pay. In other cases, a board of directors approves a severance payment well in excess of the company's contractual obligations.
The size of some severance payments has led to much debate in recent years, about these "golden parachutes" and about executive remuneration generally - with some CEOs of multi-nationals pocketing hundreds of millions in cash, shares and other payments such as bonuses - regardless of whether their performance warrants such largesse.
Some have made the point that senior executives in premium roles are actually competing on a global scale, with people at the top of their industries in London, New York and other major cities. Companies will pay huge sums, including offering lucrative severance deals, to secure the right person for CEO - given the ability of a good CEO to turn around a failing company and produce millions, or billions, in revenue. Therefore, the argument goes, if you're at that level, that's what you get.
It's a bit like highly paid sports stars - there is no doubt that Real Madrid benefited commercially from signing David Beckham, regardless of what you think of his performances on the pitch. Partly as a result of his pulling power, in 2005 they overtook Manchester United as the highest earning football club in the world.
No doubt LA Galaxy is hoping for similar stuff. They should be, because they're forking out US $32.5 million over five years, and Beckham is expected to make about $200 million more in endorsements and merchandise fees. That's only about, say US$892,000 per week.
To the person on the street, these sorts of figures can seem completely over the top. What seems to cause particular aggravation, for investors, shareholders and the general public, is when a departing executive gets a "platinum parachute" worth tens or even hundreds of millions - regardless of their performance or even their contractual terms (I should add that there is no suggestion this applies in the Bridgecorp case). Abroad, there is increasing pressure on companies about this.
In the US, Barack Obama has introduced a bill to the Senate requiring public companies to allow a non-binding shareholder vote on executive compensation. The Bill has already been passed by the US House of Representatives, and is now with a Senate Committee. This is similar to legislation already in place in Australia and the UK.
It remains to be seen whether this acts as a brake on excessive payouts - it seems as though something had to be done, though, given the report in the New York Times that Hank McKinnell, Pfizer's chairman and chief executive, resigned in 2006 with an exit package worth nearly US $200 million - although the company lost more than $137 billion in market value during the six years he was on watch.
Greg Cain
Greg Cain is an employment lawyer at Minter Ellison Rudd Watts.
