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Reuters/Chris Keane
A golden parachute makes jumping a lot easier.
VERY SOFT LANDING

One reason Time Warner execs are happy to sell: $80-million golden parachutes

By Tim Fernholz

The biggest corporate offshoots of Time Magazine’s long march through history have at least two things in common: Time Warner and Time Warner Cable are at the center of the most anticipated mergers of the year, and their CEOs stand to make a fortune if they can get the deals done.

Time Warner CEO Jeff Bewkes’ media conglomerate is expected to receive a sweetened offer from Rupert Murdoch’s Fox any day now, and should it satisfy his board, he’ll walk away from the company with a $79-million payday. Time Warner Cable CEO Rob Marcus just needs the government to approve his company’s merger with Comcast, and then he’ll be out of a job and $79.9 million richer. (Pity poor Joe Ripp, CEO of the recently spun-off print media arm, Time Inc.—he’s facing cost-cutting and $1.3 billion in corporate debt, with no deep-pocketed suitor in sight.)

Those kind of paydays can attract public ire, especially in the case of Marcus, who agreed to sell his company just two months after becoming the firm’s top manager, earning a golden parachute as part of the merger deal that includes a $20-million cash bonus along with stock compensation. Bewkes, on the other hand, became CEO after a multi-decade career at Time Warner and its subsidiaries. His payout is entirely due to the vesting of his stock compensation if he leaves the company when control changes, though it’s possible that negotiations over a fully-realized deal will yield additional pay.

Compensation plans like these originated in the go-go days of the 1980s, as US corporate raiders perfected the art of the hostile take-over. David Yermack, a finance professor at New York University, says that managers were often loathe to give up their job, even if a deal made sense, so golden parachutes were created to take managers’ personal financial situation out of the picture, so they wouldn’t protect themselves while their companies stumbled. Research suggests that this worked pretty well for company shareholders, especially if the compensation is equity-based.

Such parachutes, and the takeovers the trigger them, are much rarer in Europe, where capital markets are more conservative and executives tend to be paid less than in the US—in one notable case, a German telecom CEO was actually prosecuted for taking a large golden parachute, despite securing a lucrative deal for stockholders. He was eventually acquitted.

As part of the Dodd-Frank financial reform package, in the US shareholders can now vote separately on whether or not they will approve a golden parachute. But it’s not clear what would happen if they voted against the deal—the votes are non-binding, and the board dissolves as soon as the deal is finished, leaving them free from any repercussions. Like most attempts to reign in executive pay, this one appears to have fallen flat, in part because it’s hard to demonstrate why shareholders lose.

“More often, this is a big payday for the stockholders, and it’s not so easy to find anyone who’s worse off,” Yermack says.

Still the Time Warner duo’s packages, while enormous by the standards of normal people ($80 million is equivalent to 1,557 years working at the US median household income of $51,371) are modest compared with the top ten largest change-of-control payouts on the books today, which are valued at upwards of $100 million.