You’re Fired!

By David Nelson, CFA

You’re fired! Whether it’s Donald Trump on The Apprentice, or your boss asking for your security pass, getting fired is an emotional event. Fear, failure and yes even panic are the first emotions we deal with. It often means tapping into savings and a step down in your lifestyle while you scramble looking for a new gig. The two week severance package doesn’t go far so if you are smart, you hit the ground running.

It works just a little differently inside the ivory tower. Once inside the C suite of a fortune 500 company the rules change. If the company is public, you’ll have a board of directors whose job is to hire and fire the Chief Executive Officer. Talent doesn’t come cheap in the major leagues and it doesn’t here as well. Lately, it appears that the board of directors at some of our nation’s largest companies have forgotten their mandate. They don’t work for the CEO. They work for the shareholders. Their responsibility is to protect shareholder interests and make sure we receive a return on our investment.

They decide what is appropriate compensation for the CEO, approve the company’s financial statements, approve or discourage acquisitions and mergers etc. In their desire to attract talent they often add perks to a pay package that cost them nothing up front but in hindsight look ridiculous. The perks and pay packages really become suspect when they are forced to eliminate the CEO or Chairman.

The latest addition to a long list of CEOs with their hands out is Occidental Petroleum’s (OXY) Ex-CEO & Chairman Ray Irani. On Christmas Eve Occidental settled with the former Chairman regarding his severance package. Mr. Irani will receive a lump sum of $14 million which is below the $16 Million he was fighting for. He was forced to give up his role as Chairman in May of this year. According to Bloomberg from 2001 to 2009 Irani received an annual compensation of $80 million. He received over $45 million last year when he gave up the CEO role.

I don’t have a problem with CEO’s receiving high salaries. I do have a problem when salaries of this magnitude are awarded while the CEO is also the Chairman of the board. “Severance” packages that give millions to CEOs who are forced to resign defy logic. The massive sums being paid sound little like severance and more like tribute.

All of this comes on the heels of Freeport’s (FCX) board awarding current CEO Richard Adkerson an upfront severance of $36 million. Earlier this year ousted CEO Aubrey McClendon of Chesapeake Energy (CHK) and Tom Ward of Sand Ridge Energy (SD) received severance packages of $67 million and $95 million respectively.**

While the Mr. Irani’s package looks pale compared to those offered by Chesapeake (CHK) and Sand Ridge (SD), one of his perks stands out. On top of the $14 million, Mr. Irani will receive $1.3 million per year for life to cover his security costs and financial services. He’s right up there with the Clinton, Carter, Bush 1 & 2 and eventually President Obama. All Ex-Presidents receive Secret Service protection in retirement. I’d really like to know why Mr. Irani needs tier 1 security for the rest of his life.

Oh yeah, I forgot. They gave him a lifetime parking space at OXY’s corporate headquarters. I’m sure that’s what put the deal over the top.

Funds managed by David Nelson are currently long (OXY)

** Source Wall Street Journal