Morgan Stanley, MBNA Disclose Severance Amounts
06/01/05
Board Alert
In recent disclosures, the $3.5 billion securities firm Morgan Stanley and the $12.3 billion commercial banking company MBNA go beyond the usual bare-bones descriptions of their CEOs’ post-employment agreements. The companies’ proxies explicitly state the dollar amounts their top executives will receive if and when those executives leave.
In a Feb. 15 filing, Morgan Stanley calculates the total value of the package its CEO, Phil Purcell, would receive under different termination scenarios if his employment were to end on or before Nov. 30, 2005.
The March filing of MBNA doesn’t calculate the current value of its chief executive’s severance package. It does, however, spell out estimates of the pension benefits its CEO, Bruce Hammonds, and the company’s four other most highly compensated executives would receive at age 65. The figures are based on the executives’ 2004 salaries and their estimated Social Security benefits.
So why did Morgan Stanley and MBNA take the leap? One possible reason is that they’re both on the defensive.
“With [Morgan Stanley’s] share price not doing that well, I’m sure they expected a pushback,” says Morningstar analyst Meghan Crowe, regarding the fact that Phil Purcell got a significant raise this year.
Morgan Stanley may also have been motivated to disclose Purcell’s payout because, according to some experts, his dismissal is imminent. The CEO is likely to be let go within the year, some speculate, given-among other things-the firm’s poor share price performance compared to investment banks like Lehman Brothers and Bear Stearns.
MBNA has even more reason to try to stand out as a poster child for prudent executive compensation practices. Despite the company’s strong performance, governance advocates and analysts have been criticizing its compensation arrangements for years.
“In 2002 their top five executives gathered in over $115 million, which is enough to make someone blush,” says Morningstar analyst Ryan Batchelor. “In 2004 that’s down to $35 million for the top five executives.”
Unlike Morgan Stanley and MBNA, the great majority of companies keep the exact amounts of their executives’ exit packages private.
“What they have to disclose is the contractual obligation between the company and its executive officers, but they don’t have to value it,” says executive compensation consultant James Reda, the managing director of James F. Reda & Associates. “The same thing’s true of the pensions. If you look at the pension tables, they describe what executives are going to get each year, but they don’t usually value it.”
Compensation committees increasingly have been retaining consultants to calculate their top dogs’ payouts for the board’s personal use, however. That trend has been on the upswing since members of the NYSE compensation committee claimed to be shocked when Dick Grasso walked away with $140 million deferred compensation in 2003.
Designed to help compensation committees avoid surprises, the consultants’ breakdowns, or “tally sheets,” most often spell out the effect of the company’s share price appreciation on executives’ stock grants. Sometimes they go further and break down the costs of executives’ perks and likely payouts under different termination scenarios.
While the compensation committees of several companies, such as Staples and Michaels Stores, mention their review of tally sheets in their proxies, few include those tally sheets’ actual calculations.
Morgan Stanley and MBNA are the exceptions. For example, the Morgan Stanley proxy states that if Purcell were to leave “for cause,” he “would retain equity awards and balances for which restrictions have ended, valued at [$13.4] million” as well as $3.2 million-the sum of the balances the company would owe him under its 401(k), pension, voluntary non-qualified deferred compensation, employee stock ownership and pension plans.
According to MBNA’s proxy, Hammonds, who at 65 will have been with the company for 34 years, will receive an annual benefit of more than $107,000 under the company’s pension plan, annual Social Security benefits estimated at $22,548, and annual benefits under MBNA’s supplemental retirement plan estimated at $1.9 million.
Described as “models of what the future may hold” by Reda, proxies as explicit as Morgan Stanley’s and MBNA’s are still controversial. Corporate governance advocates like The Corporate Library’s senior research associate Paul Hodgson laud their explicitness as “exemplary.”
“Granted, when (Carly Florina) signed her contract in 1999, what she would get was very clearly spelled out,” says Daniel Moynihan, a principal at Compensation Resources. “But here we are five years later and the whole world says, ‘Wait, she’s getting $23 million?’ The average shareholder would like to know at least once a year.”
But some compensation experts assert that such disclosures are unnecessary, expensive and potentially harmful to a company’s bottom line.
“To get there is a lot of work,” says Reda of the hard-to-calculate termination-scenario figures Morgan Stanley disclosed. “I wouldn’t be surprised if it cost them $400,000 to put that in their proxies.”
Reda asserts that such calculations are also potentially misleading because they’re based on numbers that could change significantly by the time the executives actually leave the company.
“For example, if the change in control happens six months from now and some of [the executives’] awards have vested by then, they wouldn’t be part of the change-in-control payment because they wouldn’t be accelerated,” he says.
Another potential risk of including explicit calculations is public censure. The business media is more likely to harp on an actual number, says Reda, and that can distract management and consequently have a negative impact on the company’s bottom line.
