Where Nokia went wrong with Elop’s golden parachute

As he prepares to leave Nokia for Microsoft $MSFT, outgoing CEO Stephen Elop’s $28 million golden parachute—triggered by the sale of most of the company to Microsoft—is all the rage in Finland. Literally: The prime minister says the sum is “outrageous,” while the finance minister fears it will disrupt “social harmony.”

The payout, which is more than quadruple Elop’s annual pay last year, is a hard pill to swallow for egalitarian-minded Finland, where wage hikes tend to be regulated in national agreements between trade unions and employers.

Here are the three main missteps that got Nokia into trouble:

1. Nokia’s lawyers were sloppy with Elop’s contract. Elop arrived at Nokia from Microsoft, becoming the first non-Finnish chief executive in 2010. His contract included a “change of control” clause that is typical for US CEOs, where take-overs are more common, than in Europe or Asia. These clauses typically have a “double trigger,” according to Stanford Business School professor David Larcker, that goes into effect if the company is taken over and if the executive’s job is terminated or his duties are changed. The fact that this clause went into effect when only part of the company was sold, and with Elop voluntarily stepping down to join Microsoft (where he is in the running to become the company’s chief executive) suggests these two trigger clauses might have been poorly written if they were intended to align Elop’s financial incentives with the company’s shareholders.
2. Nokia didn’t dispel rumors about Elop being a mole. It’s surprising that Nokia would have been lax with Elop’s contract, considering that rumors had been circulating since Elop’s arrival at Nokia about him being a “Microsoft” mole who intended to subvert Nokia. It’s hard to believe that the company’s board didn’t anticipate those concerns, and Nokia’s poor performance under Elop—who, in fairness, was dealt a tough hand—didn’t dispel them. Nor did his decision to adopt Microsoft’s mobile operating system.
3. The public relations were badly managed. The situation became worse after the company’s chairman initially told reporters that Elop’s pay package was the same as his predecessors before explaining that it was much about €14.6 million ($23.6 million) more generous due to the accelerated vesting of stock options, adding to public suspicions of foul play. When Elop was asked to voluntarily surrender some of the payments, he cited his on-going divorce—which commits half of his assets to his wife—as an excuse.

As far as Nokia shareholders are concerned, it’s not a huge loss: They are still getting €5.44 billion for the company, so Elop’s severance package should have a limited financial impact, not to mention that Microsoft is paying about 70% of it. The controversy here is more about the process by which Finland’s flagship company was sold and the country’s skepticism about disproportionately high pay to executives. That would change in the unlikely event that the golden parachute leads shareholders to veto management’s decision to sell the company.