January 12, 2007
The Interesting, Increasing Absence of the Executive Employment Agreement
Eric Dash reports in today's New York Times Business Section that more and more companies are foregoing signing their chief executives to employment agreements as a way to avoid having to pay massive severance agreement if the executive is prematurely fired for poor performance:
The new heads of Exxon Mobil, PepsiCo and Pfizer don’t have one. Nor do the chief executives at Citigroup, General Electric and Procter & Gamble. And some corporate governance experts say shareholders are better off as a result.
It is an employment contract, and it has been in the spotlight ever since a number of prominent chief executives were ousted with golden goodbyes — Robert L. Nardelli’s $210 million exit package from Home Depot being the most recent. Employment contracts, agreed upon when a new leader arrives, have been blamed for virtually guaranteeing such huge payouts even when that executive fails.
But it doesn't look like executive employment agreements will be disappearing anytime soon:
While they may be tarred by controversy, employment agreements are still common at many large corporations. And compensation experts do not see them going away soon.
“Rumors of the employment contract’s demise are greatly exaggerated,” said Jannice L. Koors, a managing director at Pearl Meyer & Partners. “As long as you need to do things to lure top executives from positions they are already in, you are going to have to offer them some kind of protection to get them to say yes.”
But, as the article points out, maybe increased scrutiny on these "golden goodbyes" will make excessive severance packages more rare. After all, "[i]t’s not that employment agreements are bad,” said Paul Hodgson, senior analyst at the Corporate Library, a governance watchdog group. “It’s what’s in them.”
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