Do You Need An Agent?: As turnover mounts, more CEOs turn to sports- and entertainment-style negotiators - Careers - Chief Executive Officers - Statistical Data Included

Chief Executive, The, Nov, 2001 by Catherine Fredman

When It's Time to Terminate

Nowhere is that knowledge more important than in negotiating a termination clause. Severance compensation, once covered in barely a sentence or two, has become one of the most crucial parts of an employment contract. "The shorter shelf life of the CEO is the reason that there's so much more emphasis on the golden parachute," says Nell Minow, editor of The Corporate Library, a watchdog Web site covering corporate governance and performance.

The issue is so complex that Bachelder formulated what he calls "the Seven Pillars of Termination" to cover all the reasons to say goodbye: death, disability, termination for cause, termination without cause, resignation for good reason (the result of an event that is adverse to the CEO'S interests, such as a diminution of duties or compensation), resignation without good reason, and change in control. The stakes are so high, however, that any departure for reasons other than death or disability risks labeling the former executive as damaged goods, unable to win another top job.

CEOs are not only aware of the downside of their new position. Thanks to the increased dissemination of corporate news in the popular business press, they're also aware that their colleagues' parachutes have gotten bigger and brighter. "Start with Mike Ovitz," says Bachelder. "For 14 months' work at Disney, he got more than $100 million. That's severance with a capital S."

He lists other top-dollar terminations: Coca-Cola's M. Douglas Ivester, and the former CEOs of Conseco and Banker's Trust, both of whom received a farewell handshake valued at more than $50 million. Mattel's goodbye package for Jill Barad topped $40 million.

All the issues involved in the compensation package resurface in the severance contract, plus perquisites such as the use of an office and secretary, the use of a car and driver, reimbursement for club expenses, financial and tax advice, and other more idiosyncratic items. Mattel forgave Barad the $3 million company loan used to purchase her house, and also paid $3.3 million to cover taxes on the loan forgiveness. After 18 months as CEO of Webvan, George Shaheen walked away from the now-bankrupt online grocer with a promised annuity of $375,000 a year for life.

While the actual details in a severance clause can't be hashed out until the time of departure, a smart lawyer knows that the initial protections should be set up at the beginning, before the board's passion cools. "It's a question of how many guarantees they get," says Butler. In one case, the board was so convinced that its candidate would never disappoint them that Stucker was able to insert several significant severance clauses by reassuring the board that since its worst fears would never come to pass, the termination agreements were virtually meaningless. As it turned out, they meant a lot--and the board couldn't argue.

Even when the guarantees are less than golden, a good agent can polish them up. Bachelder explains how the process works, using fictitious Charlie Snodgrass as his typical CEO. "Let's say the compensation committee decides to let Charlie go. It's eleven o'clock at night. Four out of nine board members have agreed to terminate him. Dissenting directors may say we agree we have a problem, but we just can't dump Charlie this way. In order to get the majority of the board to support Charlie's termination, it becomes necessary to satisfy additional board members that the departing CEO is being treated reasonably. It is at such time that a lawyer who is familiar with these types of situations can be helpful."