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Why ‘Golden Hellos’ Elicit Mixed Reactions

As more and more CEO have left their jobs in spectacular flame-outs—Ron Johnson’s short tenure at JCPenney comes to mind—there is a countertrend of companies luring top executives with multimillion-dollar “golden hello” signing bonuses. Bloomberg’s Jeff Green reports that the number of companies making upfront payments to get people to sign up has jumped to more than 70 in 2013 from 41 in 2012, according to governance advisory firm GMI Ratings.

“Golden hellos, mostly paid in options and stock grants, got costlier amid rising stock markets after the recession ended in 2009. Among the biggest this year: Zynga’s $45 million package to attract game-industry veteran Don Mattrick as chief executive officer.” Green reports. Governance experts such as Harvard Law School professor Lucien Bebchuk says, “golden hellos” are not good from an investor perspective. Bebchuk, a long-standing critic of CEO pay has researched compensation and equity practices for many years. “Equity incentives that have not vested yet should best be viewed as ones that have not been earned yet,” he told Bloomberg.

Bloomberg’s Green suggests that they should be concerned. For example, JCPenney shares slumped 50 percent during Johnson’s tenure, while Hewlett-Packard Co. dropped 46 percent under Leo Apotheker, ousted in 2011, just 10 months after getting $8.6 million in signing bonus and relocation benefit. In total, Apotheker was entitled to about $34.7 million in cash and stock for less than one year’s work.

Most of these bonuses are paid in options and stock grants rather than pure cash. Golden hellos were highlighted earlier this year when Barrick Gold Corp. investors, including Canada’s six largest pension funds, opposed an $11.9 million welcome package in cash to co-chairman John Thornton, the former Goldman Sachs Group Inc. president.

Most observers believe that new hires should perform first.

“The incentive should be that they will come to the company, perform and be rewarded,” said Jon Luther, chairman of Arby’s Restaurant Group Inc. and former Dunkin’ Brands Inc. CEO. He also told Green that candidates for high-level positions who asked for signing bonuses to take jobs at companies where he was a board member have been rejected in favor of those who didn’t.

GMI Ratings now include golden hellos as a negative mark in its rating system of companies. In 2011, S&P 500 companies awarded 34 signing bonuses, a 26 percent jump from 2009, GMI found. The surprising gain prompted the governance firm to look beyond the index. The payouts have risen even as CEO turnover fell to the lowest since at least 2004 last year.

Companies that offer the signing bonuses claim the practice is necessary in order to cover compensation that new CEOs had to forgo for leaving their previous jobs. This may explain why hiring an outside CEO costs about a third more than promoting from within, according to Equilar.

There are, however, times when golden hellos do pay off. “Best Buy’s shares have more than doubled since the consumer-electronics retailer lured Hubert Joly as chief executive in 2012 with a welcome package including a $3.5 million cash bonus and equity grants and options valued at almost $13 million,” writes Green.

However, it’s unclear whether the trend will slow down any time soon. Zach Warren of IC Inside Council reports that last year, 26 percent of new S&P 500 CEOs were brought in from outside the company, according to executive recruiter Spencer Stuart. “Golden hellos are a necessary evil, but it seems to take a life of its own,” says Tom Sapporito, CEO of RHR International. “CEOs tend to peg compensation by the market and this practice tends to accelerate its rise. It’s like baseball players. Compensation just keeps going up regardless of what it should be in relation to, say, TSR or whatever the ordinary metrics are.”




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