Timing of severance, merger deals might give CEG shareholders pause

December 28, 2005|By JAY HANCOCK

Exhibit 10(A) of Constellation Energy's third-quarter financial report could have made you some money if you knew it portended a merger deal and a temporary pop in Constellation's stock - but not as much money as it's going to make company boss Mayo Shattuck.

The document, filed Nov. 9 with the Securities and Exchange Commission, was the first of three lucrative renegotiations of Shattuck's "golden parachute" severance agreement made while the company was contemplating a merger that would trigger the deal.

Golden parachutes, around for two decades, are supposed to keep top bosses from worrying about losing their jobs in a merger and to make them work harder for shareholders. But the pace and size of Shattuck's upgrades - almost right up to the announcement Dec. 19 of Constellation's merger with Florida's FPL Group - make you wonder if the shareholders got the best part of the deal.

Shattuck, who was a Constellation director before stepping in as CEO four years ago, is to be chairman and a senior executive in the new company - No. 2 to CEO-designate Lew Hay, who runs FPL.

Under most scenarios, Shattuck would get what I conservatively calculate to be $40 million in merger-related pay, including long-term stock options converted to cash and accelerated vesting of a pension of $2.4 million or higher, starting at age 62, for what might be only six years at the company.

And that doesn't include:

More than $10 million or so in vested options and stock units held by Shattuck before the merger.

Raises ensuring he'll make no less than Hay, who just got a raise himself.

Millions of dollars more in difficult-to-value new options intended to induce Shattuck and other executives to stay with the merged company.

Excise taxes, probably in the millions, that Constellation will have to pay for exceeding federal golden-parachute guidelines.

Employees, shareholders and BGE customers are deeply interested in parachutes and the drain on resources they represent. Last week, Coca-Cola's board, submitting to pressure, agreed to require shareholder approval for these kinds of packages.

But Constellation doesn't want to say much about them. The company declined to comment on my math or Shattuck's multiple parachute amendments, but spokesman Larry McDonnell defended ample pay for executives.

"Clearly, this management team has performed extraordinarily well since 2001," he said. "They've tripled the size of the company. The return to shareholders has really been extraordinary."

Constellation argues in the second-to-last version of Shattuck's contract that a parachute would "avoid the loss or the serious distraction of the executive to the detriment of the company and its stockholders" while the merger is being carried out and after it is completed.

OK, but why did the company redo the parachute three times over two months while eyeing a merger that would almost certainly activate it?

Changing golden-parachute terms shortly before a merger is not unheard of, but it has gotten less usual, says Steven E. Hall, managing director of a New York executive-pay consulting firm bearing his name.

"Generally people got their [parachute] programs in place and just left them," he says.

Top Constellation executives, including Shattuck, had signed what are fairly routine parachute deals in 2004 that gave three times annual base pay and bonus if they got let go or demoted in a merger, plus enhanced pension and health benefits

The Nov. 9 amendments kept the same basic terms but added inducements for executives to stick around after a merger, extending the time they could work and still get severance under some circumstances and awarding new stock options.

These "replacement" options essentially duplicate previously held options and give bosses a second chance at a payoff. Existing options are cashed out in a merger if they're worth anything; replacement options - with higher share-price targets - are supposed to "incentivize" executives to cause stock in the merged company to rise even higher.

Looks like double-dipping to me. But Hall says no, because executives forgo possible future gains when they cash out long-term options in a merger. Replacement options in the post-merger company, he says, "are giving you the upside that was there before."

OK, but the deal also gave bosses insurance against the risk that the merger would wreck the company - while still letting them profit if the stock goes up. It's a major upgrade to the previous "change-in-control" packages.

On Dec. 14, Shattuck's lawyers renegotiated his agreement again, slightly altering his three-times-salary-and-bonus severance, requiring three years of post-severance medical and life insurance and reiterating the replacement-options provision.

Four days later, a day before the merger was announced, Shattuck signed a new, three-year employment deal.

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