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Absurdity of the Golden Parachute

A golden parachute is a binding agreement between a company and an employee (most often a CEO but in some cases all the employees) detailing considerable benefits for the employee if the employee is terminated or retires. When executives retire, parachutes are sometimes known as "golden handshakes." "Golden parachute" payments may also benefit employees should there be a change in ownership or control.

The overwhelming flaw with this system is that they may secure an egregious level of compensation regardless of performance. This is absurd.

Proponents of this inane policy believe that golden parachutes make it easier to hire and retain executives, dissuade takeover attempts by increasing the price of the offer, or keep an executive objective when he or she is considering a proposal on the sale of their company. This does not make sense. First there are plenty of executives all over the world who would earn reasonable compensation, have been hired, retained and continue to do a great job. To address the second point: Surely, if you were about to receive a $400 million parachute by allowing the sale of the company you manage, you would sell to whomever at any price just to receive your flagrant benefits!  This is clearly not in the interest of shareholders.

Typically, exit packages involve a cash severance of two or three times the salary plus bonus. Keep in mind - this is an executive's salary which has already ballooned. These agreements also often call for accelerated vesting of stock awards, option awards and pension benefits, quickly boosting the size of the total payment.

Get ready for this. If the golden parachute received upon a change of control is at least three times the executive's average annual compensation for the five preceding years, then the amount surpassing the average annual compensation cannot be deducted by the company against its taxable income. The executive pays a 20% excise tax for golden parachutes on everything over his or her average compensation for the preceding five years, though many companies offer to pay that tax for them, costing shareholders even more.

What is even more perplexing, and just utterly illogical are "golden coffins." As if "golden parachutes" were not enough, many executives will receive huge packages after they die, says the Wall Street Journal. Without an act of Congress, the only way these practices will change is if shareholders demand it. We should carry on the struggle for a new system. We must liberate the corporate stronghold. Give shareholders a voice!

Comments

Carl,

First, I want to say that this is an excellent blog.

Second, was it not an act of Congress that brought this problem (among others relating to corporate ownership) about? The laws passed in the early 1990s effectively stopped the hostile takeover mania of that period, and made shareholders weaker players. I don't believe one bad piece of regulation requires another when unintended consequences result. That is one of the primary methods through which the State gains control over private capital. What we need to repeal the bad regulations first, and replace the oversight powers of stockholders (the principals, after all) relative to those of the boards (the agents).



How nice would that be to give the shareholders a voice! How do you suggest we, as the "small voiced" shareholder, accomplish this task? Correspondent letters to Congress would (no doubt)be fruitless, since these highly paid executive-types are the very people who are able to afford to contribute funds toward the political arena. Yes, the "Golden Parachute" is quite a concept, when you consider the exorbitant amount these executives are obtaining for the simple task of being fired for the malfunction of the corporation they work for! Their compensation should be set up similar to a commissioned sales person, which means they don't draw a paycheck if they don't sell anything (or make a profit, in their case)! When the corporation stocks begin to drop, the executive should reimburse the corp. to help pay the losses!



Mr. Icahn,

I couldn’t agree with you more about the absurdity that these golden parachutes entail. The first executive that comes to mind who in my opinion was overcompensated throughout his time in power, was the former Chief Executive of Home Depot, Bob Nardelli. As a former shareholder, I feel his $30 million annual salary on top of his $210 million golden parachute severance package was totally unjustified.

On a separate note, as someone who has been following your career, I wish you the best of luck with everything. I want to thank you for being a business role model who stands for change and accomplishes exactly what you intend.

Sincerely,

Jeffrey Staller
School Showdown, Inc.



Carl,

Thank you for writing this blog. Absurd is the perfect word to describe these agreements. As a shareholder, I need to know this information. Because dollar for dollar, these decrease the value of the company.

Good luck with your blog, I look forward to more posts.



At a way, Carl.

Stick it to them. You are "The Man".

Hartley Lord, Las Vegas



Mr. Icahn,

Thank you for your blog. You would think that after Nardelli these golden parachutes would be out of style. I am sure there are many qualified CEOs all over the world. Maybe we should outsource these positions as well. KBR seems to be doing OK moving to the Middle East.



I think Harold has it right, in his comment above: "I don't believe one bad piece of regulation requires another when unintended consequences result."

If shareholders are passive about the details of their company, or if the law stops them from being actively involved in their own company, then those are the things that should change.

Otherwise, controls breed controls. One control causes a problem; then, another control is instituted to fix that problem. The correct response is to go in the other direction and unwind the excessive legal controls.

Personally, I think the whole system of tax-subsidized 401-Ks and the financial EMT philosophy has bred passivity among small investors.



Mr. Icahn,

Coming from perhaps one of the only men in business that deserve such grand compensation, your opinion is refreshing to say the least. As a recent graduate of business school, I feel much better knowing that not every executive feels entitled by default to inordinate sums of money - you provide a great example for my generation. I agree with the above comments that the word "absurd" is an apt description of the golden parachute.

But I am curious about the greater picture here. If golden parachutes are "too much" compensation, then was is an "appropriate" level for executives? In today's bachelor business education, we as students are taught simply that the market determines fair compensation. Personally, I think "absurd" again describes this rationale well. You would certainly have my rapt attention if you ever expounded on this subject.

Geoff D, Bloomington IN



I believe some of those which are called CEOs! are not in fact worth even a big salary! Let alone a parachute! Let alne the parachute be golden! :D

Regards,
Sepehr



Mr. Icahn:

How about bonuses and incentives based on a 3 or even 5 year period rather than annually?

This would also be good for banks and other industries where managers and executives get much of their remuneration based on annual performance.

It seems to me that one reason for the subprime mess was cheap money and all the brokers, bankers and management making so much money on growth and income that nobody cared if the loans were ever paid back years from now. They would just take all the money now and however the cards fell later would be may not be their problem.



Perhaps in addition to focusing on the 'absurdity' of the golden parachute an examination of the rationale behind the 'absurdity' would yield an even grater understanding of why the golden parachute even exists.

I am thoroughly enjoying this blog. Many thanks.



Great blog, Mr. Icahn.

The only way to send a message to out-of-control WallStreet (and sister insitution, Federal Reserve) is to simply invest somewhere that is proven to have retained real value over thousands of years (yes, I'll say it, GOLD).

Washington and WallStreet have become the two-headed hydra keeping this country from prosperity. We are headed for some tough economic times and hopefully the American people will say "Enough is enough!"



Thanks for giving us insight into this area of the corporate world. I was well aware of the large payoffs to corporate execs, but I didn't know the terms used or even the basic mechanics of them that you outlines.

I did not know about Golden Coffins though. The whole idea of a company paying for someone dying (and not on the job) is crazy.

While reading this the first thing that came to mind as a humorous solution was the make "Golden Anvil" agreements. If you bring us great success by bringing the company to the proverbial promised land, you get a nice bonus as you walk out. If you decide the ship is leaking and it's best to bailout and leave the rest of the crew to try and plug the holes you made, you still get to keep the anvil. However, at sea being attached to a large metal object is probably dangerous, and wrecking a company through negligence or incompetence should be a costly failure. If the IRS and tie a chain to your assets and drag you down a long road to hell, so should your stockholders.



"if you were about to receive a $400 million parachute by allowing the sale of the company you manage, you would sell to whomever at any price just to receive your flagrant benefits! "

Seems like an incentive to get fired as well.



Mr. Icanh

Shareholders want to make the most from their money, executives and company founders want to make the most money out of shareholders money.
But,mostly, both make the most money out of small fish stocks investors like for example me.
So, what are we talking about??
M.



Mr. Icahn

I am going to boost your ego now.

You have a brilliant mind, and you are someone who I wish to become someday,
but,
after reading the posting of the replyiers to your original post, it is certainly clear that individuals with a brilliant mind has an advantage of the ones without, and which is the majority.
I am sure you got my drift.
M.



UNBELIEVEABLE!!!!!! YET THIS KEEPS HAPPENING OVER AND OVER AND OVER!!! What is wrong with the boards or compensation committees of all of these companies?? Oh yeah......forgot, they are all old college pals or pals of pals. (Just saw your interview on 60 minutes.) From a female in corporate America and in the SOUTH, let me confirm it is a "good 'ol boy" world.
Got a GREAT deal for you if you'd like to buy a beautiful resort on the coast of Georgia that is in very bad financial shape..... the good 'ol boys really MADE A MESS OF THINGS and it is a very special place!!!!



It's only indicative of the fact that the "good ole boys club" has gotten more sophisticated in recent decades. No matter what happens Bob, we got your back. So, be our CEO, ruin our company and we can retire early to the golf course.

By a show of hands...how many in the room actually believe that we live in an honest system? Pointing it out (unless it's for good humor) seems hardly necessary anymore. I'll concede it is at least a little entertaining watching all of those behind the bell curve playing catch up. It will really be fun watching them get old with no health care, social security and a retirement plan worth today's monetary equivalent of about 10K. By then I'll be on one of those Caribbean islands giving boat rides to tourists who were once company CEOs!

Now, what amazes me are the people who show up in droves to work for, go to church with, take advise from and actually support the very corruption they fear will occur if some other country takes us over with weapons of mass delusion. Go figure!

Who needs enemies when ya got corporate leaders like these?!?



How can society and organizations advance from ignorance to knowledge when they reward ignorance as just as easily as knowledge?Not a good breading ground for innovation or advancement. But,it does prove one point and that is the powers to be, prefer the comfort and attitiude of darkness and ignorance rather than knowledge and light.Only a ignorant ,knuckle dragging ape would reward another ignorant knuckle dragging ape for failure.This is corporate USA and the UK.There is no real justifiable reason to have these creatures taken seriously ,we sadley have to put up with the disease.Its the 21st century.

Darwin claimed men are evolved from apes....Yep!some men are and thats as clear as day.There rest of us don,t adhere to the popular much publisized theory.



I agree with Carl.



thank you



From what I know, I agree with your philosophy 100%. Good work, Carl.



Mr. Icahn-
I saw your metaphor on CEO's on TV today. Very good. I have a further thought. The CEOs' bonus and severance packages are so high that the focus is totally on this year's bonus. They could care less about the future because getting "canned" would be a financial windfall. Hence, to support this year's balance sheet, huge risks are taken and the books are manipulated. If they make to next year, the process is repeated.



I agree that boards do little or nothing for their fees and stock options, etc. Whether that is due to bad intent or simply the result of the fact that committees rarely are effective decisionmakers may be debatable, but their nearly total ineffectiveness seems beyond debate. However, what is the solution to this problem? Changing laws to make it easier to sue a company for its executive's "bad" management doesn't seem to favor shareholder interests, either. If you could persuade the big mutual fund families like Vanguard, Fidelity, etc., to become shareholder activists - that would seem to be a more likely solution to me. But how can that be done?



Carl,

First of all, thanks for all you do for us small shareholders.

Your focus on golden parachutes is absolutely correct. How many years has Congress been talking about Executive Pay? Seems like it's whenever there's some outlandish payment paid to a terminated executive. But as soon as the heat is off the issue is forgotten. Where's the SEC in this process?

My view is it starts with shareholders and the election of the Board. Ah, part of the problem is that the CEO introduces people he or she wants on the Board. And so the Board Members are in his/her pocket. And so, they are the ones who participate in approving the golden parachute packages.

The Compensation Committees of the Board of Directors are the ones who should be drug kicking and screaming before Congress and asked to explain these packages. Maybe that would get their attention and bring some accountability. Why does Congress keep asking the CEO, he/she didn't approve the package.

You have a huge voice, and if you were to have the greatest impact yet in Corporate America, it would be to focus the spotlight where it belongs -- on The Board of Directors!



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