The real cost of firing a CEO: showing top execs the door can be an expensive proposition -- and not just because of hefty severance packages.

Author:Mendels, Pamela
Position:Corporate Governance - Statistical Data Included

When G. Richard Thoman resigned from Xerox Corp. after only 13 months as CEO in May 2000, the struggling photocopier company reached deep into its pockets to see him off.

Thoman had left under pressure from dissatisfied board members of the Stamford, Conn.-based company, which was reeling from a stock price nose-dive, a botched sales-force reorganization and back-office consolidation that left the company in chaos. A $13 million deferred compensation plan payment was only one feature of his severance package. Then 55, Thoman also received a bonus of $376,000, a $200,000 payment in place-of-life insurance, office assistance for two years and an $800,000 annual payment for life, according to SEC filings.

Thoman's multi-million-dollar send-off-and he had supporters for his decisions during his tenure -- was hardly unique. Ample packages for departing CEOs are so common that they barely merit headlines anymore. But huge as they can be, such payments are often the most obvious costs that corporations incur when an out-of-favor chief leaves. In no way are they the only costs. A company pays dearly when it loses prized talent and when worthy projects are left on drawing boards.

To be sure, boards of directors rarely consider dismissing a CEO without good reason, and nine times out of 10 they act wisely, says Charles M. Elson, director of the Center for Corporate Governance at the University of Delaware at Newark. Still, he warns, "a termination is never without costs," and sometimes, he says, the expense can be substantial.

That observation rings with particular resonance today as CEO firings have become almost humdrum. Jacques Nasser, former CEO of Ford Motor, and Linda Wachner of Warnaco, an apparel company, are among the latest members of a swiftly growing club. In the early 1970s, about 10 percent of CEOs left large, publicly traded companies under pressure, according to a recently published study in The Journal of Finance. By the early 1990s, that figure had jumped to 23 percent, says Mark R. Huson, a University of Alberta at Edmonton finance professor who is one of the study's authors.

Some of the costs of firing a CEO are easy to measure. "Golden parachute" severance guarantees, for example, are now standard in CEO employment contracts. Unless the chief has been convicted of a felony or engaged in other beyond-the-pale behavior, the company usually has to pay up, says Edward C. Archer, managing director at Pearl Meyer & Partners, a New York-based executive compensation consulting company.

A typical severance package starts by giving the departing boss twice his or her annual salary and bonus, but some agreements provide for much more. After Jill Barad resigned at the board's urging from toy maker Mattel in February 2000, she received five times her annual salary; forgiveness of a company loan to buy a home; a $3.3 million payment to offset certain taxes; and an assortment of other features, including temporary security services.

After paying the departing CEO...

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