Overly generous severance packages may reward underperformance—leading up to the termination or retirement of an executive—and may reflect a lack of independence on the part of the board of directors. These separation benefits can be employment agreements, severance plans, or granted on an executive's departure.
Often companies adopt severance agreements to compensate executives for mergers or takeovers. Known as golden parachutes, these plans can encourage senior executives to support a takeover that may not be in the best interests of long-term shareholders because executives will be rewarded generously if a takeover occurs. Worse, their cost may reduce the value ultimately received by shareholders.
Large golden parachutes also can create negative tax implications. If severance payments exceed three times an executive's compensation, the company loses its tax deduction for the compensation. In addition, many companies reimburse executives for their "excess parachute payment" excise tax, further increasing the company's cost of the severance benefits.
For this reason, institutional investors favor requiring shareholders to approve executive severance benefits in excess of three year's compensation. Subjecting such agreements to shareholder approval helps protect the board from manipulation and ensures severance payments are reasonable and appropriate.
As part of his severance agreement, Coca-Cola's former chairman of the board and CEO, M. Douglas Ivester, received a six-year consulting agreement worth $675,000, office space, furniture, supplies, a company car, home security service and club dues. In total, Ivester's retirement package was reportedly worth $119 million.
Steven Heyer, Coca-Cola's former president and COO, received a severance package reportedly worth at least $24 million after only three years on the job. Jack Stahl, also a former president and COO of Coca-Cola, received a severance package reportedly worth more than $25 million. Douglas Daft, former chairman of the board and CEO of the company, was paid more than $36 million when he retired in 2004.
