* Severance difficult to revoke, experts say
* CEO pay contracts tightened since Enron, Tyco
* Executives resignation often negotiated
By Tom Hals and Dena Aubin
WILMINGTON, Del./NEW YORK, May 20 The IMF now
faces a challenge that keeps members of corporate compensation
committees up at night: explaining why they may have to pay a
handsome severance package to an indicted executive.
Companies have worked hard in recent years to avoid such a
situation by rewriting employment agreements to deny a "golden
parachute" to disgraced executives.
Former International Monetary Fund managing director
Dominique Strauss-Kahn, facing charges of attempted rape in New
York, resigned his post from the global lender on Wednesday.
Strauss-Kahn's contract entitles him to a one-time
severance payment of $250,000, the IMF said on Friday.(For
details click on [ID:nN20238456])
Strauss-Kahn has denied the charges and vowed to prove his
"Assuming he's guilty, this would be every company's
nightmare -- to pay severance to someone who's a felon," said
Alan Johnson, managing director of compensation consulting firm
Many companies can deny severance payments to any executive
fired "for cause," which generally means breaching a company's
code of ethics or a criminal conviction.
However, having such a provision and enforcing it are
different matters altogether, and fallen executives often
negotiate their departure in private rather than exposing the
issue to the public scrutiny of a court fight.
TYCO CEO NOT FIRED FOR CAUSE
Mark Hurd, for example, resigned as CEO of Hewlett-Packard
Co (HPQ.N) after the board found that he filed inaccurate
expense reports involving a female contractor.
If the board had taken on the fight and terminated him,
they might have saved the millions of dollars he received in a
severance package -- provided they prevailed.
The case of Tyco International Ltd's TYC.N disgraced
former CEO Dennis Kozlowski, who is in prison for looting the
company, shows how hard it is to fire someone "for cause."
The company could not invoke that clause unless Kozlowski
was convicted of a felony that was materially damaging to the
company, according to Institutional Shareholder Service, a
group that advises big investors. In addition, three quarters
of the directors had to vote for it, ISS said.
Kozlowski resigned and the clause was not invoked at the
time. If an executive is terminated for personal, non-work-
related actions, the board has to decide how much of a threat
the executive's behavior poses to the organization.
"It becomes a gray area," said David DeBoskey, an assistant
professor and compensation expert at San Diego State
Executive compensation contracts usually have a moral
turpitude clause that could void the contract for illegal
conduct, but that typically applies only to conduct on the job,
For conduct off the job, the board of directors would have
to prove the employee's actions damaged the company. Courts
apply strict readings of contracts, which might mean the board
ends up being obligated to pay the severance, he said.
"It could become a legal battle," DeBoskey said.
As a result, scandalized executives tend to negotiate their
Not long after Harry Stonecipher was brought back to lead
Boeing Co(BA.N) out of a series of ethical scandals, he was
caught having an affair with a subordinate.
Rather than face termination, he resigned and did not
receive any special severance.
In part, "for cause" provisions are a response to the
corporate scandals around the turn of the century involving
companies such as Enron Corp, WorldCom Inc and Adelphia
Before then, many companies did not think about for-cause
provisions, said compensation consultant Johnson.
"At least in U.S. industry, the number of these kinds of
outrageous situations has been very small," he said.