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executive's pay


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Watch It: If You Cheat, They'll Throw Money!


There may be only one type of job in which somebody can commit a felony and, after being fired as a result, still receive a severance package worth many years of salary. The job is chief executive of a large corporation.

Over the last decade, many top executives have quietly persuaded their boards of directors to insert a remarkable set of protections into the executives' employment contracts. The contracts have made the executives nearly immune from dismissal, ensuring that they will receive millions of dollars when they leave their posts, under almost any circumstances.

In effect, the protections have reduced the risk in a job that the executives themselves describe as high-risk, high-reward.

Some contracts have gone so far as to restrict the kind of felony convictions that permit companies to deny executives a severance payment. At Fortune Brands, the maker of Jim Beam bourbon, Master Lock and other consumer products, for example, a felony must result in personal enrichment for Norman H. Wesley, the chief executive, at the expense of the company.

At J. C. Penney, a felony conviction would cost Allen I. Questrom his severance only if it involved "theft or moral turpitude." And before LG&E Energy, based in Louisville, Ky., was acquired by a British power company in 2000, it exempted its chief from good-cause dismissal for any felonies "arising from an environmental violation."

More broadly, executives have asked companies to remove contract clauses that could deny them severance payments, also known as golden parachutes, if they fail to perform their duties. In a sign of how much influence executives have gained over their own compensation, many companies have complied, inserting clauses that restrict dismissible offenses to deliberate misbehavior. "The scope of what constitutes cause has gotten narrower over the last 10 years," said Robert J. Stucker, a lawyer in Chicago who has represented Leo F. Mullin of Delta Air Lines, Robert L. Nardelli of Home Depot and other chief executives during contract negotiations.

"There is an understanding on both sides of the equation that you have to do something pretty bad for it to be constituted as cause," Mr. Stucker said.

CVS, Kellogg, Honeywell International and many other companies cite "willful gross misconduct," along with a conviction, as one of the only reasons they can fire an executive for good cause.

Executive employment contracts came to the fore last week after L. Dennis Kozlowski was indicted on charges that he failed to pay more than $1 million of New York sales taxes on paintings he had bought. At the board's request, Mr. Kozlowski resigned as chief of Tyco International, a conglomerate, forfeiting his contractual right to a severance payment that would have exceeded $120 million.

Had he chosen to fight the board, however, Mr. Kozlowski's contract might have given him room for an argument. The contract states that he could be fired for cause only if he were convicted of a felony that was "materially and demonstrably injurious to the company" and if three-quarters of the Tyco board then voted to oust him.

The board and Mr. Kozlowski will negotiate a new severance package after Tyco finishes its investigation into whether he used company money for personal expenses, a person close to the directors said.

Stephen E. Kaufman, Mr. Kozlowski's lawyer, declined to comment. Since 1999, Mr. Kozlowski has made more than $300 million in salary, bonus and sales of Tyco stock.

A growing number of investors, angered over the ways executives have protected themselves, have tried to restrain the size of golden parachutes, by introducing and voting for shareholder resolutions. But the effort is unlikely to have a big impact in the near future, analysts say.

Outside the executive suite, most employees work at the will of their employers and can lose their jobs for almost any reason. Many companies have a code of conduct mentioning broad ideals like integrity and responsibility, and violations of the code can result in termination.

"Generally, employees can be fired for anything whim, the color of their shirt other than discrimination," said Michael C. Harper, a professor of employment law at Boston University.

Even those workers covered by a collective bargaining agreement or a company policy that says they can lose their jobs only for a specific reason the failure to do their job or a conviction, for instance usually receive just a fraction of their annual pay as severance, if they get anything, lawyers said.

Top executives, by contrast, have increasingly received golden parachutes that pay a few times their highest annual compensation, including their bonus and sometimes even their proceeds from stock sales. Many packages also award large chunks of company stock. Jacques A. Nasser of Ford Motor, Jill E. Barad of Mattel and Durk I. Jager of Procter & Gamble are among the chief executives who have received millions of dollars in severance despite tenures widely considered to be failures.

The payouts typically produce a chorus of criticism from investors, but boards often had no choice at the time. Having agreed years earlier to narrow contract language, many boards locked themselves into giving these large severance packages to their chief executives.

Many analysts see the shifts in language as further evidence that the market for executive pay is largely devoid of the tension inherent in most negotiations. Corporate directors, whether out of desperation to hire someone they want or out of sympathy for someone with whom they have worked closely, often agree to executives' wishes. Many boards may give raises even in bad years and allow the executives to control much of their contract language.

As a result, not only has executive pay grown much more rapidly than other workers' salaries, but rules covering executive benefits like pensions and severance have also become more generous even as they have become stricter for other employees.

For executives, "it is not unusual to see that `for cause' equals felony, which is, of course, absurd," said Nell Minow, a co-founder of the Corporate Library, a research group in Washington that studies executive contracts. "There is just not another job in the world in which `for cause' would not include not actually doing your job, or otherwise embarrassing the organization."

Ms. Minow added: "The reason we pay these people so much money is that it's a high-risk job. And in a high-risk job, if you don't perform, you should be out," without a large severance payment.

Albert J. Dunlap, the notorious former chief executive of the Sunbeam Corporation, is one of the few executives to be denied a severance payment by his board of directors. The board fired Mr. Dunlap in 1998, when a series of accounting scandals nearly caused the company's collapse.

Earlier this year, Mr. Dunlap and other former Sunbeam executives agreed to pay $15 million to settle a shareholder lawsuit accusing them of releasing misleading information. Mr. Dunlap is still in a legal fight with the company over millions of dollars in severance pay he is seeking.

Many compensation consultants and executives' lawyers contend that only an extreme case like Mr. Dunlap's should result in no golden parachute. They say that chief executives are recruited away from very appealing jobs and that they need to have some job security in their new positions.

"These contracts are negotiated on the way in, when everyone thinks the person is going to do a good job," said Jannice L. Koors, a vice president at Pearl Meyer & Partners, a compensation consulting firm in New York. "That's why they're hiring him."

Mr. Stucker said that broadly worded clauses about performance could allow a board to fire an executive arbitrarily and face little consequence. More specific contracts ensure that executives can be denied severance only if they clearly violate business norms, like not coming to work, abusing drugs or committing a crime directly related to the job.

"To say that all felonies are reason to terminate, I'm not sure about that," Mr. Stucker said. "You could say it reflects badly on the company. Well, yeah, so does divorce."

Clarkson Hine, a spokesman for Fortune Brands, said the language about felonies in Mr. Wesley's contract was also in previous chief executives' contracts at the company.

A spokeswoman for Jane C. Pfeiffer, an independent consultant who is the head of J. C. Penney's compensation committee, declined to comment on its chief executive's contract, as did a spokesman for LG&E Energy.

The contract of the current LG&E chief, Victor A. Staffieri, does not make an exception for environmental felonies, as the previous contract did. Instead, it makes almost the opposite exception.

Mr. Staffieri can be fired without severance only if he commits "repeated willful misconduct" or a felony in the course of his duties. The contract does not say if other felonies would be considered cause for dismissal without severance.

In the months since Enron's collapse, shareholders have tried to restrain the size of golden parachutes in ways they did not during the long bull market of the 90's. At more than 20 companies, including Boeing, Citigroup, General Electric, PepsiCo and Verizon Communications, investors have introduced resolutions this year to reduce future severance payments, according to the Investor Responsibility Research Center in Washington. Investors submitted 13 of these proposals last year.

In the balloting so far this year, the resolutions have received an average of 41 percent of shareholder votes, up from 32 percent last year.

For a simple reason, however, the votes are unlikely to make severance payments less common or contract language less narrow. Under current law, boards can ignore even most of the resolutions that pass.

Left to their own devices, directors seem more willing to listen to their executives' ideas than to their shareholders'.