Interview: Jack Dolmat-Connell on CEO Severance

There has been significant news about CEOs leaving companies on poor stock results, and still receiving huge severance packages, so it seems that perspective is in order. Jack Dolmat-Connell, president of compensation consultancy DolmatConnell & Partners, is one who can provide it.

BB: Why are cases of failure getting such elaborate severance packages?

JDC: If you let someone go, there are usually clauses in the severance agreement that they will get X portion of their unvested equity, which is often the biggest piece of some of those eye popping numbers. Looking at the value up front – two or three years out, when you have some significant equity to go – that’s where you can see 20, 30, 50 million dollars.

BB: Why do boards agree to such packages?

JDC: Because [the CEOs] end up giving up a lot when they are let go or leave, they want that more or less guaranteed on the front end of coming to a new place. The person didn’t perform, but that’s what it took us to get them here in the first place, otherwise they probably wouldn’t have come. You settle on your candidate. You’re trying to woo them, often away from someplace where they’re doing well. The candidate often does have bargaining advantage.

BB: But when the average tenure of a CEO these days is between 2.5 to 3 years, don’t the boards consider the likelihood of paying out?

JDC: Worse case scenarios or negative case scenarios are not modeled out. Everything looks good and nobody’s considering the fact that this person won’t work out. Five years down the pike, the stock price is 25% down.

BB: What about stronger negotiation on the company’s part?

JDC: Particularly with your high profile companies and CEOs, the CEO hires a top-tier lawyer and law firm to negotiate these. Inside counsel is generally doing the negotiation [for the company] and writing the contract. It generally is an unequal playing field.
(Note: I'll have an in-depth article on this topic in the April Corporate Secretary.)