Look At This Severance Package - Is This Reasonable?

Paul Hodgson is Senior Research Associate of The Corporate Library

Even when you know these things are coming, it doesn’t make them any better. Interim CEO Rudy Graf replaced Leonard Tow as CEO of Citizens Communications (CZN) in July this year. We have known about Tow’s employment agreement for some time now, but the final cost of the separation is, predictably, even higher than initial estimates. Tow’s separation agreement was filed on 4 August this year, and can be found in full at: http://www.sec.gov/Archives/edgar/data/20520/000002052004000028/towagreement.txt.

A rough calculation of the cost of the separation comes to a total of $39,310,082. This does not include the cost of benefits, and wait until you read about those benefits! Nor does it include the economic value of the early vesting of Tow’s stock awards. Nor does it include the $65.1 million in split-dollar life insurance policies.

Here is a summary of the costs:

$2,250,000 through remainder of the agreement;
$3,500,000 bonus;
$3,200,000 for termination of advisory contract;
expenses up to $150,000 per year;
(i) tax, financial, estate planning, legal and accounting services; (ii) membership dues and other non-discretionary charges, for Rockrimmon Country Club and University Club; (iii) computer, phone and internet expenses at the Executive's homes in Connecticut and Martha's Vineyard and for all cell phone and pager charges;
all stock awards vest immediately;
1,816,477 and 300,000 in added restricted stock awards worth in total around $26,985,082;
up to $2,000,000 in health and healthcare, plus medical, dental, hospitalization and health plans, plus access to the company doctor;
"the Executive shall be entitled to continue to use his current office at the Company through December 31, 2004, after which time he shall be entitled to retain his office furniture and furnishings, and the Executive hereby agrees that he shall have responsibility for removing such furniture and furnishings from the office as soon as reasonably practicable following December 31, 2004. In addition, the Company agrees to continue to (i) employ the Executive's current driver and secretary during the Severance Period, such employees to be made available for use primarily by the Executive with such schedule and pursuant to such other terms as shall be mutually agreed upon by the Company and the Executive, and (ii) during the Severance Period, provide the Executive with the use of the Company car which is being made available to the Executive as of the Termination Date or such other Company car as the Company and the Executive may agree."

And all this is for NOT working for the company anymore.

Is this reasonable? Tow is not being terminated; he is merely resigning, albeit before the end of his contract. In addition, he is remaining as chairman of the company until the end of 2004. So what possible justification is there for this showering of largesse on a CEO who has already been well, indeed, excessively, paid for his work? The only justification I can see is that it was in his employment agreement already. But why was it there?

There seemed, and still seems, to be some kind of attitude in corporate America that a CEO with long tenure deserves to be paid and provided with perks for the rest of his life and – given Tow’s extraordinary life insurance arrangements – in Tow’s case beyond death. Tow served as CEO of Citizens for 15 years; therefore he has every right to continue to be kept in the manner to which he has been accustomed. This was apparently the case with Jack Welch, formerly of GE (GE), and it is also the case here. It is as if paying them during their employment is not enough. You can hear the board say: "Well, Leonard’s been used to this, we may as well just let him have it." This attitude betrays itself not only in the total cost of this agreement – and, believe me, $40 million will be an underestimate – but also in the small things.

He gets to keep his office furniture and furnishings?

He gets computer, internet and phone services at BOTH his homes?

Dues and non-discretionary charges at TWO country clubs?

There is undoubtedly much more that is not revealed in this agreement – there was in Welchgate – but we are not to be exposed to those kinds of details.

I am glad to say that The Corporate Library already rated Citizens’ board an "F" for effectiveness. Could I have lowered it further following this revelation, I would have.