Rewarding CEOs who fail

The board demanded his resignation, and if ever there was a case for firing someone for cause, this would seem to be it.

So why is HP paying Apotheker more than $13 million in termination benefits?

Just three years after the financial crisis generated widespread public outrage that Wall Street chief executives walked away with hundreds of millions in bonuses and other compensation after driving their companies into insolvency and plunging the nation’s economy into crisis, multimillion-dollar pay for failure is flourishing like never before. HP is simply the latest example, albeit an especially egregious one.

It’s hard to fault Apotheker for taking what HP offered. But among the many questions shareholders should be asking the board is why it approved an employment agreement for Apotheker that arguably made it more lucrative for him to fail, and the sooner the better, than to succeed.

“It’s a great irony that spectacular failure is rewarded lavishly,” Stanford Law School professor and American Law and Economics Association president John J Donohue said.

“It is a terrible mistake to set up a structure where the top person walks away with millions even if the company is laid waste by their poor decision-making, yet this is what’s happening. It’s a shocking departure from capitalist incentives if you lavish riches on the losers.”

He added that it’s especially shocking at HP, which fired its previous two chief executives before Apotheker and had to make multimillion-dollar payments as a consequence. “After what HP had gone through, you’d think the board would have been on their toes rather than asleep at the switch again,” he said.

Experts opine
Experts said that Apotheker had what amounts these days to a fairly standard termination agreement for a chief executive. In the event he was terminated for “cause”, his contract, a summary of which HP filed as an exhibit to a Securities and Exchange Commission filing, provided a cash payment of twice his base pay (of $1.2 million, or $2.4 million); his earned but unpaid bonus (his “target” bonus was $2.4 million a year); any accrued but unused vacation, and “no further compensation”. That would add up to a maximum of about $4.8 million. But he wasn’t fired for cause.

In the rarefied world of high-level executive compensation, “cause” is a term of art that long ago parted company with standard usage. “Cause is a foreign concept to the general public, at least when it appears in executive employment contracts,” observed Orrick Herrington & Sutcliffe head (global employment practice) Mike Delikat, saying he’d litigated many such provisions on behalf of major companies.

“Most people are employed at will, which means they can be fired any time and for any reason unless the reason is an unlawful one like discrimination. But ‘cause’ is a negotiated term. It is often very narrow, limited to things like conviction of a felony or a complete failure to perform material duties under the contract,” he added.

Apotheker’s contract wasn’t quite so narrow (“I’ve seen worse,” said Delikat). But it did narrowly construe “cause” to mean only “material neglect” of his duties or “conduct” that he “knew or should have known is materially inconsistent with the best interest of, or is materially injurious to, HP”.

While such clauses may be open to interpretation, the board appears to have given no consideration to firing Apotheker for cause, which might be difficult to establish considering the board backed his various strategic initiatives, however ill-fated they proved to be. Once Apotheker was being terminated “without cause”, a clause in his agreement kicked in that accelerated the grant of 200,000 shares of “sign-on equity grants” and another 76,000 restricted shares and 6,08,000 “performance-based restricted units” as “long term incentives”.

You’d think that long-term incentives would no longer be necessary or appropriate for someone who’d just been fired, and that anything “performance-based” would be rendered moot by the plunge in HP’s stock price during Apotheker’s tenure.

On the contrary. Thanks to his termination, “all restrictions shall be released” on the grants of restricted stocks, and the supposedly performance-based awards would assume that he was employed “through the end of the performance period,” according to his contract summary.