Suit Over Fiorina Severance Questions Pay Practices

Companies may now have yet another reason to make sure they are clear about how they pay their top executives. Four union pension funds have filed a lawsuit alleging that Hewlett-Packard breached its company policy to seek shareholder approval before authorizing the payment of severance benefits in excess of 2.99 times the sum of an executive’s annual base salary and target bonus.

The suit, which was brought by the Indiana Electrical Workers Pension Trust Fund and pension funds administered by the Service Employees International Union, claims that HP paid former CEO Carly Fiorina $21.4 million in severance, plus stock options and other benefits that increased her total compensation to $42 million.

Under the company’s 2.99-times rule, however, Fiorina shouldn’t have received more than $15 million, says Michael Barry, a partner at Grant & Eisenhofer, the New York law firm that field the suit.

“What it looks like is that Hewlett-Packard has been maintaining publicly that they are committing to limiting severance payments to 2.99 times annual salary and bonus, but when push comes to shove they feel that they can disregard it and characterize the payments as something else,” he says.

The suit was filed March 6 in U.S. District Court for the Northern District of California. HP spokesman Ryan Donovan says that the company believes the lawsuit to be without merit.

The suit highlights the very common disconnect between shareholders and management, says Ira Kay, global director of executive compensation at Watson Wyatt Worldwide. “The question is what does Hewlett-Packard say is severance and what do shareholders believe is severance,” he says. When stock options, pension benefits and cash incentives are involved, there is often confusion about what constitutes severance, he says.

Companies need to address this issue when explaining in their proxy statements how they pay their executives, consultants say. That may mean going beyond what the pending Securities and Exchange Commission rule will require. The rule, which is expected to take effect next year, will force companies to include a narrative explanation of how they pay their top executives. But Kay suggests that more might be necessary. Companies should include a tabular format that shows clearly the amount an executive will get under a certain set of circumstances, he says.

Added disclosure might help the situation, but the real issue is that shareholders are tired of companies paying executives for failing to perform, says Bruce Ellig, who was head of human resources at Pfizer for 25 years and is the author of The Complete Guide to Executive Compensation.

“This is a shot across the bow for all compensation committees,” he says.

Companies that don’t control what they pay their executives and who continue to stick to murky pay practices could find themselves keeping HP company in court, Ellig says.

—Jessica Marquez