Designing the CEO exit package.

• Author: Thomas, Gerard, Jr.

Few milestones a company and its board face are more critical than the board's decision to part ways with an incumbent CEO for reasons other than normal retirement or an outside takeover. Yet, despite the complexity and implications of a CEO's departure, few boards are prepared for the intricacies of the CEO exit package. After all, boards must consider everything from the treatment of underwater stock options to what, if any, medical coverage will be provided, at the same time as the company searches for a successor and tries to manage a smooth transition to the new leadership.

What makes CEO severance such a challenge for boards is that virtually every exit package is tailor-made to the CEO's personal and professional circumstances, tenure, and reason for departure. Companies generally have rejected generic templates and instead have worked to develop exit packages that fit the needs of all involved. This article examines what several companies have done when faced with the CEO's departure and suggests some guidelines board members can use to help develop an exit package that is both fair to the CEO and reasonable for the company.

Sibson & Company studied 12 CEO exit packages that were all structured between December 1992 and August 1994. (See box on page 42.) By examining these exit packages, Sibson & Company was able to identify useful and practical information on how boards can develop exit packages to fit their own companies' circumstances. These findings provide some insights on what proactive steps boards can take to make developing an exit package an easier process in the future. In general, the study revealed the following:

1. Packages are customized. Even when employment agreements are already in place, the majority of exit packages are customized to reflect the CEO's age and the number of years until retirement, the need for a noncompete arrangement for a number of years, the vesting schedule of stock option and restricted stock programs, and factors unique to the CEO.

2. Exit packages are simpler for long-tenured CEOs. The study sample of 12 companies included four long-tenured CEOs -- that is, individuals who had spent virtually their entire careers with their companies, culminating in the CEO position. The other eight CEOs studied were short-tenured CEOs -- that is, individuals who were hired into the CEO position (or other senior executive position) within 10 years of their severance. In every case of long-tenured CEOs, the exit packages were less complicated than the packages for short-tenured CEOs.

3. The value of exit packages varies widely. In our examination, the value of the exit package varied from less than one times annual pay to more than eight times annual pay.

   The Structure of Severance

   In our review of the 12 exit packages, we found considerable creativity in the elements -- cash payment; adjustments to the long-term incentive plan, such as accelerated vesting; and miscellaneous provisions, such as additional years of medical coverage -- that make up a CEO's exit package. Exit package elements that were used by at least two of the 12 companies studied are shown in the nearby table. Prevalence of Exit Package Elements

   Exit Package Element Number of Companies

   Cash Payments Cash payment equal to some multiple of either base 11 of 12 companies salary or base salary plus incentive Cash payment in recognition of the CEO's contribution 6 of 12 companies Adjustments to the Long-Term Plans Immediate vesting of 6 of 12 companies with stock options stock option plans Increase period to exercise vested options 4...