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Financial Planning > Tax Planning

Industry's golden parachutes: Colossal but common

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Prudential Financial CEO John Strangfeld, whose compensation as the highest paid industry CEO is my recent feature, does not take the top honor in a much scrutinized category: Executive severance benefits. Among the six companies within the Prudential Financial peer group — Aflac, Ameriprise Financial, Hartford Financial, MetLife, Lincoln National, Principal Financial — this distinction goes to another chief executive: Aflac CEO Daniel Amos.

Click here to view the severance packages for CEOs in Prudential Financial’s peer group.

Whether as a result of a company change in control (CIC) or termination of employment due to other reasons, Amos stands to take home $69.2 million. This amount far exceeds severance benefits enjoyed by the other peer group CEOs. Ameriprise Financial CEO James Cracchiolo, who occupies the number two spot, will get just over a third of Amos’ payout. If an eight-digit golden parachute seems out of line for a chief executive who may be leaving behind a less-than-sterling legacy, think again. An analysis by NU reveals that the severance awards of CEOs within the Prudential peer group are consistent with compensation practices at other large companies.

Why the large payouts? According to a new study on executive severance arrangements, published by Meridian Compensation Partners, the business rationale is three-fold: (1) to attract and retain executives by providing a level of protection against involuntary job loss; (2) to provide an appropriate level of benefits to enable executives to transition to new employment; and (3) to secure restrictive covenants, such as non-compete agreements.

See also: 10 of the best-paid CEOs in the life insurance industry

The study shows the most prevalent cash severance formula awarded to CEOs in general severance arrangements is two times pay, with pay being base salary plus annual bonus. Less than a quarter of the respondents provide three times pay. However, following a CIC, most CEOs (65 percent) among the Fortune 500 can expect three times pay. This compares with two times pay for 23 percent of the companies polled.

A review of CIC severance packages for the CEOs among Prudential Financial’s life insurer peers reveals most of them to be in line with Meridian’s multiple-of-pay range. Both Ameriprise Financial CEO James Cracchiolo and Lincoln National CEO Dennis Glass can look forward to three times pay following a “double trigger event” (e.g., a CIC resulting from the acquisition of a majority interest in company stock and a change in the composition of the company board).

More prevalent among the CEO subgroup is two times pay, though also following a double-trigger event. This is true of MetLife’s Steven Kandarian, Hartford Financial’s Liam McGee, Principal Financial’s Larry Zimpleman and Prudential Financial’s John Strangfeld.

The Meridian study adds that well over 90 percent of Fortune 500 companies provide for the vesting of long-term incentive awards following one of several scenarios. Among them: (1) a CIC (the most common scenario); (2) a qualifying termination of employment following a CIC or (3) the failure of an acquiring firm to assume or substitute outstanding long-term incentive awards after a CIC.

Others within the group enjoy more advantageous arrangements. Hartford Financial’s McGee is entitled to “auto accelerated vesting.” Severance packages for Prudential’s Strangfeld and MetLife’s Kandarian also provide for accelerated vesting. The Meridian study highlights another positive trend fueled by “intense pressure” from institutional shareholders and proxy advisory firms: A marked decline in formerly common tax gross-up provisions (i.e., payouts to cover excise tax on severance awards). In 2010, the report notes, 60 percent of CEOs received full or modified tax gross-ups, a number that is expected to decline to 30 percent as agreements are modified or eliminated for “new incumbents.”

The Prudential peer group is ahead of the curve. Not one of the life insurers provides a tax gross up — a testament, perhaps, to the heightened scrutiny that chief executives of financial services companies have been under since the 2008 credit crisis.

This scrutiny, and the demands of outside stakeholders, will likely increase in coming years as regulators endeavor to further restrict CEO compensation. No doubt, executive severance arrangements — a component of CEO pay that frequently inspires outrage among investors and the general public — will remain a prime target of the government vise.

For more on industry compensation, see:

CEO compensation: The sky is the limit

Pru’s Strangfeld: Is the CEO’s pay too high?

Have plane, will travel


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