John Donahoe’s pay pal

In September of 2014, eBay announced plans to spin off PayPal. This decision followed shareholder calls for a spin off, which were very publicly opposed (at least initially) by eBay’s CEO, John Donahoe. Three months later, eBay also announced that its executive team, including Donahoe, would be stepping down. Departing executives were offered large retention payments to remain at eBay until the spin off transaction was completed. These payments replaced severance payments required under the executives’ employment contracts and were subject to the condition that the executives not remain employed by either company following their separation.

Regulatory filings related to these payments disclose that John Donahoe, eBay’s departing CEO, would be entitled to a generous severance package, including a severance payment amounting to twice his salary and bonus. Vesting of his share and option awards was accelerated. In December, Forbes valued the separation package as amounting to $23 million. Its actual value will depend on how many share units vested at the time of the split, based on whether certain performance criteria were met.

PayPal was officially spun off from eBay in July of this year. Following the split, Donahoe became PayPal’s non-executive chairman. No longer an official employee of either eBay or PayPal, Donahoe was entitled to his “retention” package from eBay even though he had been retained as a director by PayPal. Not bad for seven months of work.

Following the separation, PayPal’s share price experienced a huge increase in value, with its market capitalization surpassing that of eBay. Simultaneously, eBay’s credit rating was downgraded – PayPal had accounted for half of eBay’s revenue.

Donahoe left his long post as the CEO of a marketplace now struggling to compete with online retailers such as Amazon. He did so with a hefty retention bonus, a pocketful of shares and a bright future with eBay’s former darling, PayPal. As PayPal’s star is rising, eBay’s seems to be fading. It was awfully nice of eBay’s shareholders to retain Donahoe, even if only for PayPal’s benefit. That’s what pals are for, after all.

Here’s the door… but keep the keys

Jeff Smisek, Chairman and CEO of United Continental Holdings, has been shown the airline’s emergency exit. Resigning amidst a potential scandal which is under investigation, Smisek was laden with an expensive golden parachute, valued at $8.4 million. According to calculations done by Equilar, this figure has the potential to rise to $21.6 million if corporate performance conditions are met on Smisek’s long-term incentives.

Smisek received a separation payment of $4,875,000 and remains eligible for a pro-rated cash bonus for the current financial year. Additionally, the company accelerated vesting of 60,746 shares. He also remains eligible for cash payments under the company’s long-term incentive and restricted stock award plans for three years.

The real kicker is that while many United employees were laid off this year in order to cut costs, Smisek has parachuted past them waving a lifetime’s worth of flight benefits and parking privileges. He retains his medical coverage until he is eligible for Medicare. He will receive indemnification for any tax he has to pay on his flights or his medical benefits, and he was permitted to drive away with title to his company car. Finally, he was given outplacement services to help him find a new job.

A clawback clause in the separation agreement requires Smisek to repay the separation payment, his bonus, the 60,746 shares and the cost of the outplacement services if he fails to cooperate with the investigation or is convicted, pleads guilty or pleads no contest to a felony or crime of moral turpitude.

However, no such clawback exists for cash payments made under United’s long-term incentive award and restricted stock plans, the parking privileges, the vehicle, the flight benefits, or the medical coverage. Even if Smisek is found guilty of a felony (note that there is no suggestion at the moment that he is being personally investigated for any crime), he would still be entitled to park his company car in a United parking spot and hop on a flight for free without even paying the tax. This should leave a bad taste in the mouths of investors, employees and fellow passengers.

Perks should be eliminated from executive separation agreements. Perks can be a good incentive for existing employees. However, perks should not be necessary to incentivize a former CEO to comply with his legal obligation to cooperate with an investigation into the company’s dealings. Perks should end with the job.  In the words of a United flight attendant, leave all your valuables behind and head for the nearest exit.