Rethinking CEO’s golden parachute

[…] “Professor Yvan Allaire, chair of the board of directors of the Institute for Governance of Private and Public Organizations (IGOPP), an initiative of HEC Montréal and Concordia University, objects to CEOs receiving such large payments when a firm is sold.

If it’s a negotiated sale, he believes CEOs with golden parachutes will be more inclined to push their boards to accept the deal and less motivated to negotiate a higher price for shareholders because the executive qualifies for a payout no matter what the sale value.

Similarly, he says, if it’s a hostile takeover and the CEO gets paid off as a result of having a golden parachute, again there’s no motivation to defend the interests of the shareholders.

“Whether we like it or not, it’s an incitement to sell the companies. I don’t like the motivation.”

In the 1980s, when leveraged funds tried to buy out companies, management and governing boards would try to fight them, Allaire noted. But now, with special change-of-control clauses negotiated by CEOs, many of them don’t object because it triggers a payout.

“Now, if those same people come around and say, ‘We’d like to buy you,’ you see senior management thinking, ‘Wow, that means a whole pile of money coming in. It’s an extraordinary deal so let’s go for it.’ I just don’t like that motivation.”

Instead of a lucrative golden parachute arrangement, Allaire believes a better practice from a governance point of view is for companies to just have standard management contracts in place with CEOs that merely set out what they get paid if they’re let go — for whatever reason.

The normal payoff for those types of contracts is two years’ salary plus anticipated bonuses, he says” … Read more