tampabay.com

A company cutting a CEO's severance?

By ASSOCIATED PRESS
Published January 10, 2007


Sharper Image found itself in a distinguished spot recently when the board of the troubled retailer did what most of its counterparts in corporate America have failed to do: It cut its former CEO's severance package.

In an era where bloated payouts are the norm - like the $210-million that Home Depot Inc.'s Robert Nardelli is expected to get after resigning from the home-improvement retailer - few companies are willing to slash the money that they had promised to pay executives when they depart or, in some cases, are shown the door.

Some of that has to do with ironclad employment contracts that make it hard to recoup a dime.

But corporate boards are to blame for not even trying to negotiate lower payouts when executives' performance disappoints.

Part of the problem is that the severance deals are made when the executives are being wooed to take the helm.

"It's the 'holy-cow' process," explains Patrick McGurn, executive vice president at the proxy advisory firm Institutional Shareholder Services, who says that boards become so enamored with "can't-miss" executives that they overpromise just to make the hire.

Unfortunately, many boards don't consider what happens when the honeymoon ends. What if the executive doesn't perform as expected? What happens if business crumbles? What happens if the stock price lags?

The way most severance agreements are written, many companies have to pay up unless they can prove an executive deserved to be fired for "cause." That generally means they've broken the law.

It is much more difficult to backtrack if performance is the issue. But it is not impossible, according to compensation experts who say companies have some leverage with executives who are departing for such reasons.

The trouble is that most boards shy away from such battles. That's largely because they worry it could set off costly legal fights and keep the companies' troubles in the headlines.

"A lot of companies think it is just easier to pay the severance," said Jay Warren, counsel in the labor and employment practice at the law firm Bryan Cave. "They want to deal with the bad news and move on."

That's why Sharper Image Corp.'s announcement is worth noting. The San Francisco specialty retailer chopped more than $3-million from the severance packages of Richard Thalheimer, who had founded the company in 1977 and left his post as CEO in September amid questions regarding the timing of certain stock-option grants.

Sharper Image said in a Dec. 29 securities filing that Thalheimer's severance would be $1.78-million - well below the $5-million minimum that had been guaranteed to him under a contract signed in 2002. He will get $3.9-million in retirement benefits.

The reduction in severance comes amid slumping sales and profit at the retail chain best known for its electronic gadgets. Its shares now trade at about $10 each, just about a quarter of what they were in the winter of 2004.