The CEO's Agent

Michael Sirkin counsels his top CEO clients to think of their employment contracts as prenuptial agreements. A divorce is always a possibility, Sirkin reasons, so it’s best to spell out the terms while you are still in love. And, like most prenups, the agreements tend to leave both parties “feeling a little happy and a little sad,” he says—happy to have gotten most of what was desired and sad for what was not attained.

In an era when executive turnover is rampant and companies frequently look outside for successors to their chiefs, lawyers who specialize in executive compensation are playing a bigger role in the often emotionally charged discussions about salaries, benefits, and severance. With so much money at stake, CEOs-to-be would rather have a representative play bad cop, so they don’t start off the relationships with their future boards on the wrong foot, nor do they want to leave money on the table just to appear agreeable. Negotiating these contracts on behalf of CEOs are such super agents as Sirkin, a partner at Proskauer Rose; Joseph Bachelder of his own eponymous firm; and Robert Stucker, chairman of Vedder, Price, Kaufman & Kammholz. Like high-profile sports agents, such as Drew Rosenhaus and Scott Boras, they represent the brightest stars with the largest paydays.

Like super-agents of the sports world, these CEO agents have made a name for themselves as hard-charging, tough negotiators. One compensation consultant, who has been on the opposite side of the negotiating table from all three of them, and others, refers to them as “street fighters.” The compensation consultant says, however, that some CEO compensation representatives start with “excessive demands,” and can, in fact, disturb the harmonious relations between the CEO and the board.

Too Much of a Good Thing

Such an assessment stems in part from the current culture created by such notable high-profile cases as Michael Ovitz’s $140-million exit package in 2004 from Disney after only 14 months as president and Carly Fiorina’s $21-million send-off in 2005 from Hewlett-Packard, among others.

Sirkin, an advisor to Fiorina, counsels his clients to keep in mind how a pay package may end up looking in the public eye, sometimes referred to as “optics.” “In today’s environment, it’s preferable to look at the overall economics of a package, and avoid the potential to have particulars, like tax gross ups, come up and make you look bad,” Sirkin says. “There’s always a bit of playing to the press. I always tell my clients, ‘Don’t do anything that would cause embarrassment.’ ”

Even though the most egregious cases have come from massive severance packages, CEO agents still push hard for them, especially in riskier environments, such as in industries known for high cyclicality and turnover, such as retail, investment banking, and professional services. These job scenarios often come with greater risks to would-be CEOs, whether they are turnarounds or M&A related. “There’s no question that it’s a different world,” says Bachelder. “A CEO going into a private-equity situation has a life expectancy of an NFL coach. It’s not even five years. It’s two-to-three years.” Securing solid severance deals up front is often required to seal a deal, these agents say. Today, 62 percent of Fortune 100 CEOs have severance packages in place that provide pay in the event of termination for good reason and without cause, according to Equilar, which benchmarks trends in executive and board compensation.

The point is, says Sirkin, in most of these instances the severance packages were negotiated up front, during the courtship. In practice, however, they were not severance packages so much as the pay packages used to lure CEOs to the jobs in the first place. When Robert Nardelli left Home Depot with a severance package of $210 million earlier this year, it was part of the pay package the Home Depot board offered to recruit him to the job. Nardelli had been a star at General Electric and became one of three executives considered to succeed Jack Welch as CEO. When Jeff Immelt was selected over him, Nardelli became a hot commodity, and Home Depot paid the going market price to get him.

Stucker says that CEO compensation agents aren’t yielding to public pressure to avoid what look like gaudy pay packages. “Sometimes their outside compensation consultants are being advised that there should be no severance, but then when you go back to the candidate and say ‘no severance,’ guess what? That candidate’s not coming,” he argues.