Advisory groups urge restraint on severance pay

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It's time to rein in CEO severance pay, some governance experts are urging.

The Canadian Coalition for Good Governance, which represents institutional shareholders with more than $2-trillion in assets under management, is pushing companies to pull back on excessive severance deals, executive director Stephen Erlichman said.

Mr. Erlichman says the CCGG meets privately each year with boards of 45 to 50 companies, and often discusses the size of CEO severance deals.

"The payments have to be reasonable – and don't pay for failure, that's what we're saying" Mr. Erlichman said. "Generally speaking, in Canada, CEOs are pretty well paid, and if you're going to pay somebody well for being a CEO, the board needs to address the question of do you really need to pay this person that much on a termination."

Another force urging moderation in severance are proxy advisory firms such as ISS, which advise large shareholders on how to vote their shares on proxy issues. ISS now says it may recommend shareholders vote against pay packages when the CEO is eligible to earn more than double his salary and bonus in severance payments on termination.

Hay Group compensation consultant Chris Chen has found little evidence that severance deals are becoming more modest for new CEOs this year than for their predecessors, and said the shrinking tenure for CEOs seems to be leading to demands for greater severance as protection.

"I think people are saying, 'This is the price I'm going to get for leaving my stable job or taking the promotion, because odds are I'm probably gone in three years,' " Mr. Chen said.

Shareholder pressure to increase equity pay for CEOs has also had the unintended consequence of pushing severance costs higher. CEOs are being paid an increasing proportion of their compensation in the form of share units in an effort to align their interests with those of shareholders, but it means they now normally get paid out most of the value of all those holdings when they depart. The amounts are often far larger sums than their cash severance.

Concordia University business professor Michel Magnan argues the high costs of bringing in new outside CEOs, coupled with academic research that shows they are often less successful than internal successors, means companies have a high motivation to hire internally when possible. But that requires grooming a deep talent pool.

"In my view, this [severance] is the tip of the iceberg," he said. "What it reflects may be poor preparation in terms of succession planning within the organization."