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Michigan. – More US companies are luring top executives with multimillion-dollar “golden hello” signing bonuses, undeterred even as high-profile flameouts such as Ron Johnson’s short tenure at J.C. Penney Co. expose the risks. The number of firms making upfront payments surged to more than 70 this year from 41 in all of 2012, according to governance- advisory firm GMI Ratings Inc. J.C. Penney fired Johnson in April, 17 months after giving him a signing bonus of US$52,7 million in shares to recruit him from Apple Inc.
J.C. Penney highlights the pitfalls of a practice that can reward executives who haven’t done any work yet to the detriment of shareholders. Golden hellos, mostly paid in options and stock grants, got costlier amid rising stock markets after the recession ended in 2009. Among the biggest this year: Zynga Inc.’s US$45 million package to attract game-industry veteran Don Mattrick as chief executive officer.
“Investors should be sceptical of golden hellos, which represent pay decoupled from performance and provide no retention incentives,” said Lucian Bebchuk, a Harvard Law School professor in Cambridge, Massachusetts, who has researched CEO pay.
“Equity incentives that have not vested yet should best be viewed as ones that have not been earned yet.”
Investors have so far paid less attention to golden hellos than to the large severance payouts known as golden parachutes. They should be concerned: J.C. Penney shares slumped 50 percent during Johnson’s tenure, while Hewlett-Packard Co. dropped 46 percent under Leo
Apotheker, ousted in 2011 just 10 months after getting US$8,6 million in signing bonus and relocation benefit. In total, Apotheker was entitled to about US$34,7 million in cash and stock for less than one year’s work.
“The incentive should be they will come to the company and perform and be rewarded,” said Jon Luther, chairman of Arby’s Restaurant Group Inc. and former Dunkin’ Brands Inc. CEO.
Candidates for high-level positions who asked for signing bonuses to take jobs at companies where Luther was a board member have been rejected in favour of those who didn’t, the executive said, declining to identify the companies and candidates for confidentiality reasons.
Luther said he never asked for such a bonus to take a job, and was never offered one: “I said I’ll get it done and you can take care of me when I succeed.”
Golden hellos are often a sign of other compensation dysfunctions, said Greg Ruel, a GMI senior research consultant. Companies cited by GMI for giving out upfront payments are graded a D in average for their overall pay practices – on a scale of A to F.
Take Chesapeake Energy Corp. and Best Buy Co., two companies that have been flagged by GMI for a golden hello: They also failed so-called say-on-pay votes in recent years, prompting changes in their compensation practices.
In April, the same month as Johnson’s ouster, golden hellos were brought into the spotlight by Barrick Gold Corp. investors including Canada’s six largest pension funds. They opposed an US$11,9 million welcome package in cash to co-chairman John Thornton, the former Goldman Sachs Group Inc. president.
“This is the kind of situation where you are not getting anything in advance but yet you have to pay upfront for the hopes and the aspirations of what will be delivered down the road,” Robert Gill, a Toronto-based fund manager at Aston Hill Financial Inc., which manages US$7,7 billion of assets including Barrick shares, said in an interview.
“We don’t like that. We don’t think that’s commensurate with how the industry should remunerate people.”
GMI decided to include golden hellos as a possible negative mark in its rating system in April because of evidence the payments were increasing, Ruel said. In 2011, S&P 500 companies awarded 34 signing bonuses, a 26 percent jump from 2009, GMI found.
The surprising gain prompted the governance firm to look beyond the index. The payouts have risen even as CEO turnover fell to the lowest since at least 2004 last year.
Companies often justify golden hellos by saying they cover for compensation that new CEOs had to forgo for leaving their previous employers. The payments partly explain why hiring an outside CEO costs about a third more than promoting from within, according to Chris McGoldrick, a senior research analyst at compensation tracker Equilar Inc.
Board compensation committees will have to weigh that reality as they search to fill CEO vacancies at Microsoft Corp., Lululemon Athletica Inc. and even J.C. Penney, which is seeking a replacement for its current interim CEO. Last year, about 26 percent of new S&P 500 CEOs were hired outside the company, said executive recruiter Spencer Stuart.
“The board has to decide if they want to pay the freight to move the CEO from one job to another. It’s up to the board to make sure it’s good for shareholders. I consider a request for cash a red flag, though,” said David Larcker, a professor at the Stanford Graduate School of Business who has done research on executive compensation. – Bloomberg.
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