Managing: Bailing Out Rich

MANAGING
Bailing Out Rich

Growing uncertainty in the job market and scarce top-management talent are making 'golden parachutes' fashionable in corporate India.

By Vinod Mahanta

In July last year, when the marketing head of a large consumer electronics company moved over to a diversified, but essentially clothing company, one of the clauses in his employment contract was this: whether or not he continued with the new employer, he would have the right to stay in his upmarket apartment in Mumbai for the next five years. And at the end of it, the apartment would be his.

When Rajiv Shah joined Cofuture (an HFCL-promoted company) as the CEO, after having spent 20 years at eds, he had this inserted into his contract: in case Cofuture went down, he would get one year's salary as compensation. BT learns that his annual cost to the company was Rs 1.30 crore.

When yet another senior executive from a big fast moving consumer goods company left to join a troubled petrochemical firm, he was offered ownership of the multi-crore rupee house he was moving into. The only catch: the ownership would be transferred only after five years. The good news? Even if the petrochem company's ownership changed, the agreement would stay unaffected.

Whether or not the employer wants to give you a golden parachute, depends on the industry it operates in.

They may not yet be present in all corner-room closets, but ''golden parachutes'' are increasingly becoming a part of executive severance packages. As uncertainty snowballs in corporate India, and jobs get less and less secure, edgy (top) executives are forcing their employers to write generous terms into their employment contract--just in case they get forced out. Called so because they help the employee make a soft landing in case of a job loss, golden parachutes are a means of ensuring employee loyalty and morale in the face of an uncertain future. ''Quite simply, such contracts are used to mitigate risks for the employee,'' says Ajit Isaac, CEO, People One, a placement consultancy.

Fashioned after the rules in CEO-biased corporate America, a golden parachute kicks in under one of three conditions:

There's a change in ownership, either because of a takeover or a sell out; there's a change in ownership and the executive is asked to resign; or the executive is asked to move to a different city, but doesn't want to for whatever reason.

Before you go scurrying to your hr chief, here's something you should know: golden parachutes are typically offered only to the top-most executives-the CEO, the coo, the R&D chief, or the marketing chief. Also, the hr chief is unlikely to know of it, because the dealings at that level are usually between the promoter and the executive, with the fine print being drawn up and vetted by their respective lawyers. Not infrequently, the headhunter who ropes in the executive will have a role to play in getting the exact terms of the agreement thrashed out. ''Executives are getting smarter; they are more aware of global trends and ask for protection,'' says Rahul Taneja, Vice President, ConsIndia, a Mumbai-based headhunting outfit.

Again, not all the CEOs or coos or business heads get cushy severance terms. Whether or not the employer wants to give one depends on the size of the corporation, the industry it operates in, the industry practices, demand-and-supply of top-notch professionals, and the executive's track record. Points out Sonal Agrawal, Director, Accord Group (formerly ABC Consultants): ''The relative power that an individual wields will influence his or her ability to work out a tailored parachute contract at the time of employment.''

In general, most big employers are open to some kind of beneficial severance package for key executives. If the corporation has a specific need for the top managers to stay with it for some time-say, in a turnaround, launch of a new venture, or an alliance-the incentives could be bigger. For example, the A-team at the newly created Birla-at&t-bpl telecom major has been promised a tidy sum, provided it stays on for a certain number of years and gets the company going. Others facing a problem, like IDBI-which is in a financial mess and exploring the golden parachute option strictly for the top bosses-might do so to take the sting out of a crash.

Financial Cushion

When British Telecom (BT) rewrote the contract for its CEO Peter Bonfield in April 2001, it gave him a Ł5 million golden parachute, should the telecom company get taken over or crash. That was apart from the Ł780,000 in salary and pension benefits (and a bonus) he would gain upon quitting BT. Roger Eigsti of Safeco had a better deal. When the CEO of the Seattle-based insurer was forced out by the board last year, he took home $3.6 million in severance pay, more than $300,000 in unused leave and vacation time, a car, and a golf club membership worth $100,000. And while he was forced to part with 100,000 shares from his stock options, he kept 340,000 others.

But this is India, and promoters would rather part with cash than equity in the companies they own. Therefore, most of the golden parachute agreements involve the company gifting the ownership of an apartment or a car given to the executive. In some high-risk ventures, the uncertainty may be compensated up front. For example, when Lalit Sahni joined another HFCL venture, Excelnet, he is supposed to have received Rs 14 lakh as joining bonus. His contract also ensured him a year's pay as parting fee.

Creativity is not a limiting factor when it comes to designing the golden parachute. One investment banker that Accord's Agrawal placed, wanted job security. Ergo, he was willing to sacrifice a little on the monetary front. Accordingly, his contract guaranteed him two years' salary even if he got fired sooner than that. And in case his job was terminated after two years, he'd get one year's salary as compensation.

At Bausch & Lomb, golden parachutes were used for a very different reason. When the eye-care major was scouting for a buyer for Ray-ban (its sunglasses brand), it offered generous payments to key executives to stay through the sale. Even in India, some of the key executives who chose to stay put landed a windfall of sorts. ''Incentives like these are bound to be introduced in industries prone to mergers and acquisitions,'' says Ronesh Puri, Director, Executive Axcess.

For companies, it's not a lose-lose proposition, though. Golden parachutes are great at discouraging predators. For example, if a raider knows that by taking over a company, he will lose not just the top management, but also several crores in severance, he is unlikely to follow through with the acquisition. But more often it is in its ability to motivate and retain core talent that a golden parachute is offered. So, the next time you are in a promoter's corner room, getting interviewed for the top job, don't forget to ask about the golden bail out. And pray that you never have to use it.

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