Global Policy Forum

by Andrew Ross Sorkin

William B. Harrison was beaming. Mr. Harrison, as chairman of the Chase Manhattan Corporation, had signed a deal to buy J. P. Morgan & Company for $30.9 billion the night before and was already spinning the deal to shareholders. It was mid-September 2000, the economy was in its longest expansion ever, and anything seemed possible. "It's a very fair deal," he said, grinning uncharacteristically. "And most importantly, when we look at the overall transaction two years from now, it should be accretive to the shareholders."

Mr. Harrison had reason to grin — and still does, though not because the bank's shareholders have gained as he predicted. Rather than being "accretive" — that is, increasing earnings per share — the merger has not delivered much for shareholders so far; the stock has lost more than one-third of its value in 18 months. Mr. Harrison might have been glowing because, like many top executives these days, he was about to be paid — a lot — to go shopping.

For overseeing the acquisition of J. P. Morgan, which he nonchalantly said took only three weeks to negotiate, he received a special bonus of $20 million — far more than the total lifetime earnings of the average working stiff. And that bonus, which is spread over 2001 and 2002, came on top of his $1 million salary and $5 million regular bonuses last year and whatever else he receives for this year. Mr. Harrison's three lieutenants, including Geoffrey T. Boisi, a vice chairman who had joined Chase only four months earlier, received special bonuses of $10 million each, on top of their regular salaries and bonuses. All told, Chase directors paid the bank's executives more than $50 million for their outing at the bank mall. (They had done a little window-shopping, chatting up Goldman Sachs and Deutsche Bank, before settling on J. P. Morgan.)

Mr. Harrison's huge payday is hardly an anomaly in the world of executive compensation. Mergers and acquisitions can be get-rich-quick paths for top corporate managers, providing a personal incentive to get the deal done, no matter what happens to shareholders. And they are no longer just for chief executives who sell their companies as they head for the exit with a golden parachute. Late last year, the Hewlett-Packard board offered its chief executive, Carleton S. Fiorina, a "retention" bonus of $8 million after she moved to buy Compaq Computer; it also offered Compaq's chief executive, Michael D. Capellas, $14.4 million. (Both executives later declined the bonuses to show their faith in the deal amid the bare-knuckles proxy fight begun by a Hewlett-Packard director, Walter B. Hewlett, to contest the transaction.)

So-called retention bonuses used to be reserved for executives of companies being acquired, as an incentive to stick around while operations were combined and the buyers generally took control.

Now, pay experts say executives of the acquiring companies are increasingly asking boards to compensate them simply for overseeing the integration of the businesses they buy — in part because they are not getting the same payout as their peers at the acquired companies. IT'S happening more and more," said Alan M. Johnson, president of Johnson Associates, a pay consulting firm in New York. "For one thing, it's getting harder to get these things done today. And then there's a bit of envy. The executives are going to be sitting two doors down from guys whose options just vested. They're asking `What happened to me?' "

The trend has outraged some outspoken shareholders and academics who say executives are being overpaid for simply doing their jobs. "I don't see the rationale," said Prof. John C. Coffee Jr., an expert in securities law at Columbia University. "There isn't usually a mass exodus of employees leaving from the acquiring company so that golden handcuffs are needed to keep them around."

Companies that have made such payments say it is only fair to "award C.E.O.'s willing to take the risk to make bet-your-company, bet-your-career transactions," said Claude E. Johnston, a managing director at Pearl Meyer & Partners in New York. Moreover, they say, many of the payouts are at least partially in stock, theoretically aligning the executives' interests with those of other shareholders. In the case of Mr. Harrison from Chase, half of his merger-related bonus is in restricted stock and depends on the shares of the merged company, J. P. Morgan Chase, reaching $52. They closed on Friday at $34.86. The other half, however, was in cash. The bank declined to discuss the payment. But in financial services, it is not unprecedented. NationsBank paid its chief executive, Hugh L. McColl Jr., $44.7 million after NationsBank bought Bank of America.

Still, pay experts warn that huge retention and merger award payments can pose major problems. "If they have to bribe the people on the winning side to stay, what does that say about the deal?" Mr. Johnson of Johnson Associates said. Shareholders may come to be skeptical about mergers promoted by executives who stand to make millions just for doing a deal. The chairman of Quaker Oats, Robert S. Morrison, received a package worth as much as $19.25 million this year for selling the company to PepsiCo for $13.77 billion. That is in addition to stock options worth millions of dollars that Quaker Oats had already given to Mr. Morrison — and which automatically vested when the company was sold.

PepsiCo also lent him $10 million, at terms it has not revealed. PepsiCo said the payments were part of his "current entitlements under Quaker benefit plans and the noncompetition, nonraiding of employees and nondisclosure of information restrictions under the agreement."

Among compensation professionals, one question always arises: Do merger-related bonuses affect managers' decisions to pursue deals? These experts point to merger negotiations between MCI and British Telecommunications in 1996, before WorldCom bought MCI, as one of the most egregious examples of merger compensation abuse. MCI's president, Timothy F. Price, had arranged for a $170 million "retention" pool for himself and his colleagues as part of his company's deal with BT. Mr. Price was traveling on Friday and could not be reached. The retention pool, however, was unrelated to whether the deal even closed on the terms originally agreed. So when BT cut 20 percent off its offer, Mr. Price didn't flinch. At the time, he told shareholders the lower price was "a win-win arrangement for both companies." In the end, BT's offer was trumped by WorldCom, which also agreed to pay the bonuses to MCI's executives.

The MCI-British Telecommunications situation was unusual, compensation experts said, especially for such a major strategic transaction. "Most of these C.E.O.'s are already past the point of worrying about money," said Roy Smith, a professor of finance at New York University and a former partner at Goldman, Sachs. The bonuses are "compensation as a round of applause by boardrooms filled with stuffed animals."

STILL, some compensation lawyers who often help negotiate merger-related bonuses early in takeover talks say the payments can play a vital role. "I have had a number of situations where we've gone to management looking to do a deal and been stopped at the door until a compensation arrangement was signed, sealed and delivered," said a prominent lawyer in New York who spoke on condition of anonymity, for fear of losing clients. Another well-known merger lawyer, also speaking on condition of anonymity, put it this way: "Publicly, we have to call these things retention bonuses. Privately, sometimes it's the only way we would have got the deal done. It's a kickback. And sometimes it's my job to negotiate the kickback. Unless you want to put me into early retirement, please don't use my name."

Most lawyers who specialize in advising on executive pay explain the decision to pay a bonus this way: Sometime in the middle of most merger negotiations, after major strategic and "social" issues like the name and executive lineup of the new company have been nailed down, a discussion about retention bonuses begins. Depending on how much the acquiring company needs the seller's managers through the integration process — and how badly the buyer wants to get the deal done — the buyer typically offers a bonus.

In true mergers, as opposed to acquisitions, bonuses are often negotiated for executives at both companies, to ease their fears about who will keep their jobs. Rank-and-file employees, of course, receive no such bonuses, even though mergers often result in significant layoffs. "Some C.E.O.'s start hinting to their closest friends on the board that they also want a bonus," another lawyer said. "They lay the groundwork about how hard the integration process will be and how much extra work they've been putting in. And you know what? The board buys in."

A new constituency has recently begun asking for a bonus: board members themselves. Tyco International recently disclosed that it paid one board member, Frank E. Walsh Jr., $10 million in cash and donated $10 million to a charity on his behalf to compensate him for his role in arranging Tyco's $9.5 billion acquisition of the CIT Group, a financial services firm, last year. Tyco declined to comment, instead calling attention to a proxy statement in which it justified the payment by calling him "instrumental in bringing about" the transaction. Tyco is already preparing to sell CIT, amid a financial-services industry slump.

Corporate governance experts and shareholders have been quick to condemn the practice of giving bonuses to board members because it may compromise their ability to assess deals objectively. But until the outcry over Tyco's disclosure, one banker said he was getting a lot of requests to "find creative ways to pay board members who were beginning to think of themselves as bankers."

"Since the Tyco incident, though," he added, "I haven't heard a peep about similar requests."

Shareholders can squelch payouts to executives, too, if they complain loudly enough. It has already happened at least once. Leslie M. Baker Jr., chairman of the Wachovia Corporation, recently turned down an extra bonus of $1.1 million — on top of his $1.5 million regular bonus — meant to reward him for Wachovia's acquisition of a rival bank, First Union, last year. Mr. Baker never fully explained his decision to give up the takeover bonus, but in 2002 he had passed up a $500,000 increase in his annual retirement pay after shareholders had complained. "It is painful to me to have anyone possibly feel that I would benefit personally at their or the company's expense," he said at the time.

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