Governance Insight Alert
Just before the holidays, Freeport McMoRan Copper & Gold (FCX) announced that it had torn up its employment agreement with its CEO, Richard Adkerson, who would henceforth be employed “at will.” FCX is no stranger to pay controversy, having lost two of its three say-on-pay votes, last year with more than 70% of shares cast against. Underpinning this discontent has been the solid-gold severance arrangement in Adkerson’s now-defunct employment contract, which provided for extraordinary cash severance payouts of close to $50 million for termination ($60 million for change in control).
In exchange for terminating the contract, the board has granted Adkerson a golden “hello again” award of one million new fully vested RSUs, which the 8-K characterizes as “retention” awards to be held until retirement. Retirement, however, includes termination for any reason, undermining any possible retention power of the award, which also lacks performance conditions. Indeed, time-based restrictions have been stripped from all outstanding equity awards (nearly 1.5 million options, plus $8.7 million in restricted shares, which do retain their relatively low performance hurdles).
The board may have finally recognized its error: these severance provisions perversely incentivized failure as Adkerson approaches retirement, promising a huge payout for termination without cause and nothing at all in the case of normal retirement. But the new award fails to incentivize much of anything, with no retention power and no performance conditions, and going to an executive who already held close to $65 million in stock and $27 million in vested pension benefits. This chain of events has turned a mistake into a $35 million entitlement and underlines how auto-renewing employment contracts and excessive severance arrangements bind the hands of boards and create perverse incentives. GMI tracks these critical data points, including single-click access to employment agreements, in GMI Analyst.
In addition to Freeport McMoRan Copper & Gold, this week’s Governance Insight Alert includes 20 companies whose ESG and accounting risk profiles have been affected by recent events.
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