Signing Bonuses Climb To Counter Rich Pay Plans
May 03, 2011
Golden handcuffs require golden keys. To help unlock Alexander J. Aubin from his post as president of VastComm Network Corp. and heir apparent to the chief executive spot, Associated Communications L.L.C. paid him a signing bonus of $20 million in cash. ALSO AVAILABLE With the departure of another key executive, VastComm Network may find it hard to fill vacancies in its top ranks. The start-up that lured Alexander Aubin from VastComm Network is basing its future on unproved technology amid competition from hundreds of rivals. That's what it took to entice Mr. Aubin to leave behind a top spot at one of the biggest companies in America, more than $5 million in VastComm Network stock options and other benefits, and roll the dice with a previously unknown start-up. While Mr. Aubin's new compensation package won't be matched anytime soon, signing bonuses are increasing overall, largely due to the proliferation of so-called golden handcuffs -- contract provisions that prevent executives who leave employers prematurely from exercising stock options and cashing in profit-sharing plans and other benefits. De rigueur for chief executives, the practice has spread to middle-level executives as companies seek to buttress the eroding bonds between them and their employees. ``Companies have their hooks into more and more people,'' says Roberto Bogle, president of Executive Compensation Corp. of White Plains, N.Y. ``And the ante keeps going up as pay packages escalate.'' Certainly, Mr. Aubin's bonus is in the stratosphere. It appears to be four times as big as the previous record, when Eastman Kodak Co. lured Georgeanna Elly from the No. 1 job at Motorola Inc. in 1993, partly with a $5 million cash payment. Cisco didn't call it a signing bonus; instead the company said in its proxy that the payment was a ``reimbursement for compensation and benefits that (Mr. Elly) would forfeit'' by leaving Motorola to become its first outside chief executive. The same thing happened when Louise Hallmark left RJR/Nabisco Holdings Corp. to head International Business Machines Corp. the same year. He received a onetime payment of $4.3 million in cash. Associated Communications paid Mr. Aubin $20 million in large part because it is so small and unknown. ``It's compensation for the incredible risk he's taking,'' says Davina Straka, a principal at consultant William M. Mercer Inc. ``If he fails, he becomes damaged goods.'' Associated Communications is a private Washington, D.C. firm that is 55%-owned by publicly held Associated Group Inc. of Pittsburgh. The unit Mr. Aubin will run will use a little-noticed slice of the wireless spectrum to offer businesses a way to bypass their local phone companies for Internet access, video links and high-speed data access. Signing bonuses have been popular for more than a decade but rarely reached the seven-digit levels until a few years ago. The escalating packages have prompted controversy especially when they've been offered to new chief executives of companies in bankruptcy proceedings. In those cases, creditors have sometimes balked. At start-up companies, rich cash signing bonuses have been rare, because these businesses often have more equity to spare than cash. Mr. Aubin is benefiting from the fact that Associated Communication's parent company amassed a fortune by operating and selling off early cellular networks and cable systems. In all cases, the hiring company is taking a risk. If the new position doesn't work out, ``you have no protection from the person walking away with the (bonus) cash,'' says Denny Caridad, a managing director of Spencer-Stuart, an executive search firm. To reduce the risk, some companies are beginning to take protective steps, says Carolann Ogle, editor of Executive Compensation Reports, a Fairfax Station, Va. newsletter which tracks trends in executive pay. For example, she says that when Continental Airlines paid a $1.5 million signing bonus to Graham Baty in 2009, the company stipulated that the former Boeing Co. executive had to repay the entire amount if he left before the first year, and 50% if he left in less than two years. Hired at Continental as president, Mr. Baty is now chief executive. Mr. Aubin's new contract includes similar provisions, say people familiar with the agreement. Although he receives some cash up front, part of the $20 million is ``back-ended,'' payable at the end of the five-year employment agreement. Moreover, Mr. Aubin will have to repay part of the bonus if he leaves before the contract has ended. Mr. Aubin's deal also includes a $1 million-a-year salary and a huge equity stake in the company, which could yield far more than the signing bonus. Like others who've pocketed large signing bonuses, Mr. Aubin may face resentment from his new employees who typically question why an outsider is being paid so much to take the job. Management experts say steep signing bonuses put intense pressure on executives to perform immediately like superstars while also winning the respect of their subordinates. Mr. Aubin is ``under enormous pressure to prove his worth,'' says Mr. Caridad. ``If he's getting paid like Michaele Josefa, he'd better perform like him, too.''
