This week, Heinz sounded a lot like American did last week (as we noted) in justifying the size of a golden parachute for its CEO upon the completion of a merger. Heinz’s spokesperson claimed that payments to its CEO William Johnson totaling $56 million "reflect Mr. Johnson’s success in creating billions of dollars in shareholder value," including "the 19% premium" that Heinz shareholders are to receive for their shares when Heinz is acquired by Berkshire Hathaway and 3G Capital. For those of us who consider $56 million to be a whole lot of money – no matter what they guy did for ketchup sales – the spokesperson might also have said that only about $17 million of that amount (okay, still a whole lot of money) is really a golden parachute.
Heinz’s preliminary proxy statement describing the merger agreement (check out pages 79 through 88), shows that $17 million is the value of the severance that Heinz may owe Johnson under the severance agreement that it entered into with him before Warren Buffet came knocking. The severance agreement has a double trigger, which means that the severance is owed only if there is (1) a change in control (a privately-held company buying all of Heinz’s stock counts), and (2) Johnson is terminated without cause within two years of the merger (it’s not clear yet whether that will happen). The amount of the severance is cash equaling three times Johnson’s annual salary and the average of the last three annual cash bonuses awarded to Johnson, plus three years worth of medical, dental and life insurance benefits. The double trigger and the 3-times formula for calculating the amount of Johnson’s severance, plus several years of continuing benefits, are fairly standard for a severance agreement between a Fortune 500 company and CEO.
About $30 million of the $56 million is the value that Heinz is putting on payments that Johnson will receive for unvested equity awards. Under the merger agreement, at the time of the merger, all unvested stock options and restricted stock that Heinz granted its most valued employees (not just Johnson) in the past will immediately vest and the employees will be entitled to compensation for the awards based on the same $72.50 per share price that all shareholders will receive for their shares upon the merger. While it’s true that, but for Johnson’s work as CEO, he wouldn't have been awarded all that unvested equity, the $30 million payment is not really severance. It's payment for an existing equity stake. Similarly, the nearly $100 million that is being reported as part of - by some accounts - Johnson's $200 million+ golden parachute, is the amount that Johnson will be owed under the merger agreement for his (many) Heinz shares at the $72.50 per share price. So, keep in mind the next time you see another headline about the outrageous and unprecedented size of Johnson's golden parachute that it depends on what you mean by golden parachute.