“It’s a great irony that spectacular failure is rewarded lavishly,” John J. Donohue, a professor at Stanford law school and the president of the American Law and Economics Association, told me. “It is a terrible mistake to set up a structure where the top person walks away with millions even if the company is laid waste by their poor decision-making, yet this is what’s happening. It’s a shocking departure from capitalist incentives if you lavish riches on the losers.”
He added that it’s especially shocking at H.P., which fired its previous two chief executives before Mr. Apotheker and had to make multimillion-dollar payments as a consequence. “After what H.P. had gone through, you’d think the board would have been on their toes rather than asleep at the switch again,” he said.
Experts said Mr. Apotheker had what amounts these days to a fairly standard termination agreement for a chief executive. In the event he was terminated for “cause,” his contract, a summary of which H.P. filed as an exhibit to a Securities and Exchange Commission filing, provided a cash payment of twice his base pay (of $1.2 million, or $2.4 million); his earned but unpaid bonus (his “target” bonus was $2.4 million a year); any accrued but unused vacation — and “no further compensation.” That would add up to a maximum of about $4.8 million. But he wasn’t fired for cause.
In the rarefied world of high-level executive compensation, “cause” is a term of art that long ago parted company with standard usage. “Cause is a foreign concept to the general public, at least when it appears in executive employment contracts,” observed Mike Delikat, head of the global employment practice at Orrick Herrington & Sutcliffe, who said he’d litigated many such provisions on behalf of major companies. “Most people are employed at will, which means they can be fired any time and for any reason unless the reason is an unlawful one like discrimination. But ‘cause’ is a negotiated term. It is often very narrow, limited to things like conviction of a felony or a complete failure to perform material duties under the contract.”
Mr. Apotheker’s contract wasn’t quite so narrow (“I’ve seen worse,” said Mr. Delikat). But it did narrowly construe “cause” to mean only “material neglect” of his duties or “conduct” that he “knew or should have known is materially inconsistent with the best interest of, or is materially injurious to, H.P.” While such clauses may be open to interpretation, the board appears to have given no consideration to firing Mr. Apotheker for cause, which might be difficult to establish considering the board backed his various strategic initiatives, however ill-fated they proved to be.
Once Mr. Apotheker was being terminated “without cause,” a clause in his agreement kicked in that accelerated the grant of 200,000 shares of “sign-on equity grants” and another 76,000 restricted shares and 608,000 “performance-based restricted units” as “long term incentives.” You’d think that long-term incentives would no longer be necessary or appropriate for someone who’d just been fired, and that anything “performance based” would be rendered moot by the plunge in H.P.’s stock price during Mr. Apotheker’s tenure. On the contrary. Thanks to his termination, “all restrictions shall be released” on the grants of restricted stocks, and the supposedly performance-based awards would assume that he was employed “through the end of the performance period,” according to his contract summary.
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“The system is a mess; it’s a joke,” the compensation expert Graef S. Crystal told me. Yet Congress has shown scant appetite for remedying even the most egregious practices.
I have a simple proposition: in all employment contracts, “cause” should mean the standard dictionary definition (“sufficient reason,” according to Webster’s). It shouldn’t have a specialized, absurdly narrow meaning only for top executives, such as conviction of a felony. In my experience, when language is seriously distorted — when Wall Street analyst ratings of hold actually mean sell — it’s a sign of trouble.
And the termination benefits extended to top executives should be the same for all employees. I suspect that would swiftly end the practice of bestowing multimillions on those at the top who fail. In my experience, most people don’t resent high pay for outstanding performance. But lavish termination payments ought to be anathema to anyone who aspires to a just society. It’s merit, and not failure, that should be rewarded.
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