Shocking executive payouts for mergers

Title: No Wonder C.E.O.'s Love Those Mergers
Source: NY Times
Date: July 18, 2004

This article tries to describe the ridiculous amounts of money CEOs and other executives receive when two companies merge. It comes to the conclusion that they "can become truly, titanically, stupefyingly rich." In other words, mergers have become a grotesque method for concentrating wealth.

From the article:

Wallace R. Barr, the chief executive of Caesars Entertainment, is the latest to line up for his barrel of bucks. Last week, Harrah's announced it would acquire Caesars for $5.2 billion. Thanks to accelerated vesting of options and stock awards, Mr. Barr stands to receive almost $20 million under so-called change-of-control provisions in his contract. And if Mr. Barr resigns from Caesars "for good reason," the contract says, he is entitled to an additional $6.6 million after the two companies merge.

Also:

Then there was Wachovia's proposed acquisition of the SouthTrust Corporation last month.... Wallace D. Malone Jr., the chief executive of SouthTrust [will receive] $59 million in termination awards, stock awards and options over the next five years if he leaves the bank. He also appears to be entitled to an annual pension of about $3.8 million.

Also

The California Public Employees' Retirement System, the big pension fund known as Calpers, voted against last month's merger of two health care companies, Anthem Inc. and WellPoint Health Networks, citing excessive pay. Executives stood to receive bonuses, severance payments and vested stock options totaling approximately $200 million in the deal. Leonard D. Schaeffer, WellPoint's chief executive, was entitled to $47 million in severance, stock options and enhanced retirement benefits, an Anthem spokesman said. [See also Unbelievable executive payout in California for details.]

How much money are we talking about, in general? The amounts are stupifying:

First comes the executives' severance pay, almost always nearly three times salary and bonus. Accelerated vesting of stock options and stock awards quickly follows; sometimes the options are granted with their full terms remaining - up to 10 years - giving them tremendous value.

Then there are the three additional years of pension credits that get tacked on to an executive's pay, as well as the 401(k) match, years of health care benefits and the cash value of perquisites at the time of termination - such as use of the corporate jet, country-club memberships, allowances for financial planning advice, office space and secretarial services. All in one delightfully fat lump sum.

AND don't forget that executives' pensions are often based on the unusually high severance pay, which ratchets the numbers way up.

Of course, one downside to these enormous payments is that they generate stunning tax bills for executives. Good thing their contracts almost always require the companies to pay. And how!

The so-called excise tax gross-up provisions can be so colossal that, according to one pay expert, a major merger was scuttled because the cost to cover executives' tax bills exceeded $100 million.

These payouts are grotesque because they are theft. The executives write their own contracts, so they write in these massive payouts. The article states it this way: "few people, beyond the executives themselves and maybe the company's compensation committee, know how costly these pay deals are."

They are also a grotesque form of theft because the executives should be doing this work as a normal part of their job, under their "normal" pay. Keep in mind that executives are already receiving millions and millions of dollars every year in "normal" salaries, bonuses, stock options, stock grants, benefits, retirement packages, perks, jets and so on. They should be doing the work of a merger as part of their everyday job. The article tries to justify these merger payouts with this logic:

Tim Ranzetta, the president of Equilar: "[merger payouts] encourage executives to act in the best interests of shareholders in transactions that they anticipate will increase shareholder value, which at the same time may harm their own careers. But empirical research seems to indicate that most companies underperform relative to the market after a merger while executives benefit from these large, one-time payouts."

Shouldn't an executive who is making $10 million to $50 million per year ALWAYS be looking out for the "best interests of shareholders in transactions that they anticipate will increase shareholder value?" Isn't that their job? Why in the world should they receive tens of millions more for doing their normal job? And then, the statistics show that mergers are not effective for the shareholders in most cases. So the executives fail to do their jobs AND they get paid enormous amounts of money. That is grotesque.

The reason these merger payouts exist is because they represent an extraordinarily good way to concentrate wealth. The billions of dollars being paid to these executives during mergers is coming from you and me -- the money comes from the consumers who buy products from these companies at highly inflated prices. If we eliminated these absurd executive compensation packages, prices in America would be much, much lower, and everyone in this country would be much better off.