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Caremark Merger Shows Why Golden Parachutes Are a Lead Weight for Shareholders |
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When Caremark Rx merged with CVS recently, it triggered a golden parachute for Caremark CEO Edwin Crawford that could soar beyond a quarter of a billion dollars, even though no other company employee will get any bonus, retirement benefit or severance due to the merger. Some critics of golden parachutes say such deals, especially those as lucrative as Crawford’s, give executives an incentive to accept mergers that are not in the best interests of shareholders or employees.
Crawford’s story is one of the six case studies on the AFL-CIO’s 2007 Executive PayWatch website, which was released last week. Under his employment agreement, Crawford is entitled to a severance payment of $36 million to $40 million. Although Crawford has agreed to limit his cash severance to “just” $26 million, he’ll benefit also from accelerated vesting of his stock options. This amount comes out to $22 million.
Added to that is the total amount of his full pension, which he will receive in monthly payments even though he’s not old enough to qualify for it. And then there’s a $17 million life insurance policy that transfers to his ownership. Last, but certainly not least, there’s the $248 million in stock options he can exercise.
On top of that, he’s still chairman of the combined company. According to The Corporate Library, Crawford could walk away with $287 million—not including the health and welfare benefits he will receive for the remaining eight years of his employment agreement.
Golden parachutes are excessive when you consider the high levels of compensation enjoyed by CEOs in general. If the golden parachutes are large enough, they even can encourage CEOs to support a takeover that may not be in the best interest of long-term shareholders because executives will be rewarded generously if a takeover occurs. Also, golden parachute payments may reward poor performance and their cost may reduce the value ultimately received by shareholders.
In previous years, it was difficult to determine the value of executive severance packages until an executive actually left a company. But new U.S. Securities and Exchange Commission (SEC) rules now require companies to disclose the terms of arrangements that provide payments in case of the resignation, retirement or termination of executive officers or the five highest-paid executives of a company. The SEC rules also require companies to detail the specific circumstances that would trigger payment and the estimated payment amounts for each situation.
Though the new SEC disclosure rule will show whether an executive has an excessive severance package, it does not provide investors with a way to limit them. To bring CEO pay under control, the AFL-CIO is supporting legislation and new SEC rules that would give shareholders more say over pay. Take action and tell your representative to co-sponsor H.R. 1257, the Shareholder Vote on Executive Compensation Act, which would require public companies to submit executive pay plans to a nonbinding shareholder vote, giving shareholders a “say on pay.”
Another reason Crawford may have accepted the CVS offer: The federal government is investigating Caremark to determine if executives received backdated stock options. If Caremark honchos had been involved in backdating, they would be held harmless for any actions occurring before the merger, according to the merger agreement.
Some 257 companies have announced internal reviews, SEC reviews or Justice Department subpoenas related to stock option grants. This year, the AFL-CIO Executive PayWatch website features CEOs who backdated stock options to take what they want from their companies and their shareholders with impunity.
For more information about the Executive PayWatch site, click here.
And send a message to the SEC commissioners to let them know you support giving shareholders the power to nominate directors and require companies to include these nominees on their proxy ballots.
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1 Comment
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This is corporate greed at its finest. It makes me sick. When I see families sturggling to make ends meet by taking on extra work, I think of these overpaid people and I have to wonder how they sleep at night. They have achieved their “golden parachute” by climbing over the backs of the working men and women. Every person should be outraged by the way these people do business. I wonder how much is enough!!