Royal Dutch Shell landed a big fish today with its BG Group acquisition, making it one of the biggest global players in the natural gas industry. Shareholders at BG (formerly British Gas) are pleased, too: Shell is paying them a 50 percent premium.
The stockholders in other oil-and-gas companies are also smiling now that their shares are jumping in anticipation of another consolidation wave.
But no one is perhaps as happy as Helge Lund, the chief executive officer of BG, who stands to pocket as much as $43 million from the Shell deal. As of Thursday, he's been on the job for 58 days. That works out to $741,000 a day, assuming the hard-driving CEO worked on weekends. (He said in an interview with Aftenbladet that he worked every weekend while CEO of Statoil, the Norwegian oil-and-gas company.) The takeover wave that began last year is likely to pick up speed with the Shell deal. The combinations may never pay off for shareholders: Numerous studies have documented that large mergers and acquisitions do far more to destroy value than create it.
But as with Lund, the selling CEOs involved will do very well. Equilar, an executive-compensation company, calculated that the CEOs of the 10 biggest corporate sellers in 2014 pocketed $430 million in so-called golden parachute payments.
Time Warner's Robert Marcus, for example, had been CEO for 11 months when he sold the cable company to Comcast (the deal is pending regulatory approval). He'll reap as much as $80 million, including $40 million in restricted shares that normally would have vested over five years.
Another example involves Allergan CEO David Pyott, whose arrangement to sell the botox-maker to Actavis netted him $100 million, most of it in stock options that would have vested over four years but that he was able to exercise as soon as he relinquished the reins. Lorillard's CEO likewise stands to make $45 million once he completes a merger with rival tobacco maker Reynolds American (also pending regulatory approval).
The list of ex-CEOs getting windfalls runs long. It includes the former heads of Covidien, Biomet, Baker Hughes, DirecTV and Forest Labs. James Kitts took in $164 million in bonuses, share awards and pension payments for the 2006 sale of Gillette to Procter & Gamble.
If you think this is excessive (you should if you own shares through mutual funds or directly) blame change-in-control clauses. These are the provisions in CEO employment contracts -- often negotiated before hiring -- that protect them if the company is sold. They also provide CEOs with incentives to consider merger offers that might reward shareholders but cost them their own jobs. Judging by the number of big M&A deals that have gone sour, CEOs seem all too eager to sell.
The payouts also seem undeserved. To get his velvety cushion, Lund first must complete the deal with Shell, which could take until early 2016. And his job performance must be exceptional. If he passes these tests, his package will include a year's gross salary plus 30 percent, or $3 million; a cash bonus of up to $4.5 million; an initial share award worth up to $16 million; performance-related shares worth up to $13.4 million; and other payments such as a relocation allowance and compensation for leaving money on the table when departing Statoil.
Normally share awards are paid out over three to five years, but Lund's change-of-control clause will trigger immediate payment. His remuneration could exceed his accumulated salary from 10 years at Statoil. And that's after BG had reduced his pay because of shareholder complaints that Lund had received a U.S.-sized package in excess of what Shell and BP pay their chiefs.
Why should stock-option grants, which are supposed to reward long-term performance, be triggered once CEOs sell (obviating the need to reward them for the long-haul)? Or why should restricted shares, which are meant to retain executives, vest when the company is merged with another and the executives depart (obviating the need to retain their services)? Freeing executives to entertain merger overtures without worrying about their personal fortunes is a good idea. But giving them many multiples of their annual compensation goes too far -- and results in actions not in the interests of shareholders.
Corporate boards should scale back this practice if they care at all about shareholder value.
Paula Dwyer writes editorials on economics, finance and politics.