Golden Parachutes Offered to Sub-Prime's Poor Performers May Cost Shareholders $1 Billion or More

On Thursday, the Corporate Library, whose mission is to provide independent corporate governance research and analysis to enable its clients to enhance value, announced that if boards were to fire each of the CEOs whose companies are most closely associated with the subprime mortgage crisis, it would cost shareholders an estimated combined total of $1 billion.

The average severance benefit for the 'subprime' CEOs is approaching a new record and is presently over $66 million. In all but one case -- that of Goldman Sachs-- the amount of severance benefit either decreased between the end of fiscal 2006 and November 2007, or it remained the same during that period.

The companies that were studied include Bear Stearns, Lehman Brothers, Freddie Mac, Fannie Mae, Barclays, and Washington Mutual.

Merrill Lynch and Citigroup, while they're writing off a combined $20 billion on subprime mortgage paper in the housing sector, have given fired CEOs Stanley O'Neal and Charles O. Prince, respectively, "golden parachutes" worth a combined $360 million in compensation--a fact that does not sit well with some investors and market analysts.

Some critics have called upon the SEC to create regulations such that it would not be possible for CEOs who "fail" so miserably to receive their promised golden parachutes, but would have to lose them just as their shareholder, to whom their true allegiance lies, have to take losses for their poor performances as captains of their financial ships.

Indeed, last year the SEC did propose regulations to curb the golden parachutes that would be permitted by increasing mandatory transparency that would disclose CEOs compensation and possible severance packages; this was intended to make investors more aware of "lopsided" CEO deals so that they would rise to the occasion and punish companies who did not meet their expecations.

But, some economists, financial lawyers, and journalists insist that such measures would only have the ramification of the Law of Unintended Consequences, which almost always comes into play whenever government attempts to get in on free market action. Their conclusion is that such new regulations would simply make companies offer even greater compensation to CEOs so that they could keep up with each other's top executive officers, in the way that professional sports teams now compete on price for the supposedly best available talents, resulting in outrageous salaries.

What's more, they say, performance and pay do not go hand in hand nowadays within the corporate world due to managerial structuring, and thus even if boards did elect to fire poor-performing CEOs they still would not stop a company from continuing to offer what many see as ludicrously high sums of compensation to the next guy. And, they point out, investors don't seem to have much issue with the enormous amounts paid to CEOs who are at the helm when a company is doing well.

The estimated total severance benefits in the Library's study have been calculated based on the value of unvested equity, vested retirement benefits (including non-qualified deferred compensation (NQDC), and supplemental executive retirement plans (SERPs) for CEOs as of the average of the high and low stock price on November 6, 2007. Terminations are considered as those without cause or by executive for good reason.

"The subprime mortgage crisis has already claimed two CEOs -- at Merrill Lynch and Citigroup...The 'good news' is that, largely due to the destruction in equity value many of them have overseen, it would have been over $360 million more expensive to have fired them at the end of 2006. Nevertheless, these are prime rib parachutes for subprime performance," said report author Paul Hodgson.

Original Newswire Source:
http://marketwire.com/mw/release.do?id=793604