Companies must decide how much it's worth to put a controversy behind them
When businesses pay severance packages to well-known company leaders or star talent accused of wrongdoing—or of just doing a bad job—are they getting their money's worth?
Last week, the Fox News Channel announced that Bill O'Reilly, the anchor of its highest-rated prime-time show, "The O'Reilly Factor," would be parting ways following news reports that he and Fox had, over the past decade and a half, settled five sexual harassment allegations for about $13 million.
O'Reilly has denied the accusers' claims.
After the announcement, several media outlets, citing inside sources, reported that Fox would pay O'Reilly a severance package worth up to $25 million—about one year's pay under his recently renewed contract.
Critics were outraged at Fox News over a deal giving O'Reilly almost twice as much as the women who said they were victimized by him received. That, in turn, was bad news for the network's corporate parent, 21st Century Fox, which shares common ownership with News Corp.
Making matters worse, last year Fox News cut ties with its founding CEO Roger Ailes, reportedly paying him severance of $40 million amid allegations of sexual harassment and settlements with several female employees, including former anchorwoman Gretchen Carlson. Adding to the bad publicity, CNN reported that Ailes' "lifestyle isn't suffering. He recently bought a $36 million oceanfront home in Palm Beach, Fla."
Generous severance packages are sometimes referred to as golden parachutes, although sticklers say that this phrase properly applies to payments triggered when an executive is terminated following a takeover or merger. Whatever the terminology, paying those accused of wrongdoing more money than their purported victims receive—and many times what lower-level employees will earn over their entire careers—is what public relations pros call "bad optics."
The reason why scandal-plagued companies are willing to pay millions in severance to allegedly bad actors is because they believe it's the best way to put a crisis behind them and move on, explained Alan Johnson, managing director at Johnson Associates, an executive pay consultancy in New York City.
The Best of a Bad Situation
It's common for employment contracts with highly paid talent to have clauses allowing for dismissal without severance if the employee engages in unethical or criminal behavior, Johnson said.
"But none of the allegations against O'Reilly have been proved in a court, and the settlements all stipulated that O'Reilly didn't admit to any wrongdoing. So Fox News had to consider that O'Reilly probably would have sued the company if it didn't pay him a substantial severance package, and that the suit, as it was litigated, would have continued to keep the scandal in the public eye"—and perhaps highlighted a perceived inattention toward sexual harassment at the company.
Employers in this situation "have to balance their legal rights not to pay severance with the negative effects of a prolonged negotiation or trial," Johnson said.
A key role for corporate risk managers and HR chiefs "is to make sure that the board of directors and the CEO are fully aware about the risks of losing litigation or from bad publicity, and that they are fully informed about what their choices are. The board shouldn't be asking, after the fact, 'Why did we give him $25 million, what's that all about?' "
Fixing Fox’s Corporate Culture
HR executives' responsibilities include preventing toxic corporate cultures that enable sexual harassment—or working to remedy bad cultures that are already in place. Following O'Reilly's dismissal, the Washington Post reported that:
Fox has brought on a new human resources director, and all employees have now undergone “sensitivity training,” company officials said. And the New York-based news operation has assigned a human resources employee to work out of its large Washington bureau.
Such moves could address workplace and financial concerns: Companies that spend large sums settling sexual-harassment complaints can draw the ire of shareholders.
"After seeing what Fox went through, companies are now likely a bit more sensitive to the possible PR damage that a harassment claim can do," noted Tom Spiggle, principal at The Spiggle Law Firm in Washington, D.C.
News-Making CEO Severance
While O'Reilly's departure, like Ailes' before him, stemmed from allegations of unethical and possibly illegal conduct, headline-generating severance packages more typically involve CEOs let go because their companies have hit a rough patch, Johnson noted. For instance:
In situations where terminations are not "for cause," such as unethical or illegal conduct but because "it's just time for a change," the issues faced by boards of directors—advised by pay consultants and, frequently, HR chiefs—involve how much severance the executive has a contractual right to, and whether that amount might be excessive, Johnson explained.
"Sometimes the payouts are just too big, representing two or three years of pay," plus sweeteners such as full vesting in long-term incentive programs, deferred compensation and executive pension plans, he noted.
"If you're in human resources, you should make sure that severance obligations don't become excessive. Look to filings of other public companies and make sure that your agreements or policies are competitive. If they're more generous than competitive, then everybody should know that and the reasons why."
As with the termination of any employee, he added, the question is whether the severance is fair and reasonable. "Sometimes these agreements get put in place and people just don't pay enough attention to them," Johnson said. "Then you end up paying more than you should."
When CEOs don't have contracts, "you're negotiating from a clean sheet of paper but, as with Bill O'Reilly, you don't want to have extended litigation and you don't want the ousted CEO to badmouth you, publicly or privately. You just want him or her to go away. You also want to set a precedent for other executives so they know that, even without contacts, if the arrangement ends they'll be treated fairly."
To avoid bad situations becoming worse, Johnson recommended these preparations:
- Do your analysis. "Look at what other CEOs and senior talent in similar situations received when they were terminated. Then you'll have data to back your offer, the CEO's lawyers will have their data to support the target they want, and usually you'll end up somewhere in the middle."
- Have consistent, reasonable policies in place. To avoid getting mired in negotiations, have reasonable severance policies with stated dollar figures in place to start with, "then you can just say, 'Hey, that's the deal, that's all you're getting,' Johnson noted. "If you don't have that ahead of time, usually it ends up costing the company more because the terminated CEO may be in no hurry to settle, while the company wants to get this over and done with and get the new person off and running."
- Review your policies from time to time. Make sure the dollar amounts are still reasonable and reflect the real word, "so when these unfortunate things happen, everybody is treated fairly and there's a minimum of hard feelings," advised Johnson, who compared it to putting in place "a prenuptial agreement in case of termination."
"The key is don't make severance too generous," he added. "If it's not generous enough, the CEO or senior executive will always come back and try to negotiate some more." But if it's too generous, "you won't hear anything, but you'll have wasted a lot of money."
Excessive severance also creates skepticism among customers, shareholders and the public about whether the termination was handled appropriately. "Even more important is how the deal is viewed by your employees," Johnson said. "You don't want their response to be, 'We're having a hard time here at X, Y and Z Corp., but did you hear what Mr. Big got on the way out?'"
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Source: The Society for Human Resource Management (SHRM)