Like a lot of things in the corporate world, these numbers are artifacts of a reasonable principle taken to an absurd extreme. Golden parachutes were meant partly to protect CEOs from financial harm they might incur in a merger. But "the principles were applied too widely," wrote GMI researchers Paul Hodgson and Greg Ruel. "They were applied not just to cash compensation, but equity compensation, perquisites, benefits, pensions, and virtually all other forms of pay. In principle, to protect someone from financial harm if they lose their job due to a merger, that executive needs a single year's salary and bonus."
Most of the CEOs in GMI's report received two or three years' salary and bonus, immediate vesting of equity and pensions, and retention of various benefits and perquisites. "A CEO who is retiring should not need a severance package as well as a retirement package," wrote Hodgson and Ruel.
CEOs defend themselves by arguing the value they add to their companies far outweighs size of their parachute. In some cases, that's debatable, but even where true it's beside the point. "We recognize that some of these CEOs added a huge amount of value to their companies, but then again, they already got paid for that," said GMI's Hodgson in an interview. "If you've been rewarded for your work at the company through incentives, either cash or stocks, surely that's enough reward without generating this incredibly generous retirement package on top."
Since shareholders seem relatively powerless to arrest the CEO pay racket, is government the only answer? During the depths of the financial crisis, President Obama promised to "take the air out of golden parachutes." Indeed, the Dodd-Frank financial-reform law mandates non-binding shareholder votes on adoption of merger-related golden parachutes by any listed company.
But legislative responses tend to generate their own perverse outcomes—partly, of course, because they're influenced by interested parties. GMI notes that in 1984, Congress imposed an excise tax on severance exceeding three times annual compensation. The result: Three times compensation became the floor, rather than the ceiling, for cash severance.
It's easy to say the only real answer is a more diligent shareholder class. But shareholders—especially individuals—are rationally apathetic and rationally uninformed about lots of things that impact their portfolios. The advantage always lies with the coteries of corporate elites (including compliant corporate boards) who decide, in essence, what they'll pay themselves—with reference, of course, to what other elites are getting.
"It might be a little strong to call it a racket, but it was certainly a very significant trend in CEO compensation," says GMI's Hodgson, referring to the sharp run-up in CEO pay over the past two decades. "Self-referencing is exactly what causes them all to come up to that point and say CEOs at X, Y, and Z companies are receiving this, therefore I should be getting it, too, because I have the same amount of experience."