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Severance Pay Doesn't Go Better With Coke

By Gretchen Morgenson
Issue: 12/24/05
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The New York Times

IT may be only one inch on the road to reining in executive pay, but given the way this world works, it is progress nonetheless. Last week, under pressure from one of its big shareholders, the Coca-Cola Company adopted a new policy requiring that its stockholders approve any future executive severance agreements that amount to at least 2.99 times the recipient's annual salary and bonus. The shareholder forcing the issue was the International Brotherhood of Teamsters General Fund, which raised the proposal at Coca-Cola's annual meeting last April.

Before the shareholder vote, Coca-Cola's management recommended a "no" vote on the proposal. The company gave several reasons; one was that it would dictate a restrictive standard for all severance deals whether the executive involved was a veteran employee or a newer hire.

Another reason to reject the proposal, the company said, was that each time shareholder approval is sought, it would cost an estimated $2.5 million. That was a good one, considering the $2.86 million bonus the company gave to E. Neville Isdell, Coca-Cola's chief executive, in 2004.

In addition, "flexibility" to prepare appropriate severance packages would be undermined under the proposal, Coca-Cola said. "Separation from the company can be a trying experience for any employee - executive or non-executive," the company reasoned. "Prolonging the process to gain shareowner approval would be unproductive to an effective process, unfair to the individual and disruptive to the business." Bring up the violins.

But with more than 40 percent of the shares cast in favor of the proposal, Coca-Cola's board approved the change in October. Charlie Sutlive, a spokesman for Coca-Cola, said that the policy change was in shareholders' best interests and indicated that the company listens to its owners' wishes.

Coca-Cola is not the first company to adopt such a policy; Hewlett-Packard, Electronic Data Systems, American Electric Power, Union Pacific and AutoNation have already instituted such rules. But given how much Coca-Cola has paid to departing executives in recent years, you can see why the proposal was greeted enthusiastically by its shareholders.

In 2000, for example, after three years as chief executive, M. Douglas Ivester left Coca-Cola with almost $120 million jangling in his pocket. Included were a six-year consulting agreement, office space, furniture, home security service and country club dues. Steven J. Heyer, a former Coca-Cola president, struggled under the weight of a severance package worth $24 million when he left the company in 2004. He held his position for only three years as well. And Douglas N. Daft, a former chief executive, pocketed more than $36 million when he left Coca-Cola in 2004.

STILL, it is a testament to out-of-control executive pay that under the Coca-Cola proposal shareholders will have a say only when a severance package exceeds 2.99 times an executive's salary and bonus. Alas, that figure has become a benchmark in severance packages.

"The '2.99 times' severance multiple is the standard, which is what is making it so difficult to roll back severance benefits," said Michael Kesner, principal at Deloitte Consulting in Chicago. "While the board would like to be more conservative, management points to the fact that the data is overwhelmingly at 2.99 times. So, the board is forced to perpetuate the high multiple."

Never mind that a lot of these bums should receive diddly on their departure, since they destroyed shareholder value rather than enhanced it.

Shareholder interest in these giveaways comes not one minute too soon. Severance packages that result when a company is acquired or merges have contributed to some of the more ridiculous payouts this year. The merger of PacifiCare Health Systems and the UnitedHealth Group, completed last week, generated a $300 million windfall for 39 PacifiCare executives, including stock options and retention pay. And last April, Toys "R" Us disclosed that 21 current and former officers and directors could receive more than $170 million for selling the company to an investment group.

Forcing a shareholder vote when severance packages are more than 2.99 times salary and bonus should be just the beginning for activist owners. There is much more work to be done.

For example, Mr. Kesner said, shareholders should try to force directors to eliminate severance packages altogether when the executives involved hold a slug of stock or options that will vest when their company undergoes a change of control. After all, the idea behind these packages is that they should help an executive make do in retirement or until he or she lands another job. If the executives hold millions in stock, extra financial cushions are not necessary.

And, Mr. Kesner pointed out, the limit on severance pay at Coca-Cola and other companies ignores another big-ticket item that companies typically pay when executives leave: the so-called gross-up provisions that cover personal tax bills generated by severance packages. These can be enormous and are hidden from view.

Shareholders may also want to consider agitating for caps on severance. Last May, Brightpoint, a distributor of cellphones and accessories, instituted these limits on severance for its top three executives: $9 million, $4.5 million and $2.25 million. Immediate vesting of past stock awards, in the case of a change in control at the company, is subject to the caps, Brightpoint said.

"There are all kinds of other problems with severance arrangements that compensation committees and boards don't focus on until it is too late," said Jesse M. Brill, a securities lawyer and chairman of the National Association of Stock Plan Professionals.

It's obvious that me-first executives will do nothing to stop the compensation insanity. Their shareholders will have to do it for them. Here's hoping that in 2006, they are fully up to the task.

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