Are Severance Packages Out of Control?

This morning, we learned that Nabors (NYSE: NBR) CEO Eugene, "Gene", Isenberg is leaving the company, to become Executive Chairman. Nothing wrong with that, the man is 81 years old, and wants to spend his remaining years not running a publicly traded company.

Except when you factor in his compensation package for leaving: $100 million.

Isenberg has always been one of the highest paid CEO in corporate America, but when the economy is growing at a meager 2.5% (nothing to write home about), unemployment remains over 9%, and consumers are worried about losing their jobs, a corporate executive getting a pay package that large is nothing but one word: greed.

In the press release, John Yearwood, Lead Director, said, "The Company and its shareholders are indebted to Mr. Isenberg for his many years of dedicated service. Under his extraordinary leadership, the Company grew from its emergence from bankruptcy in 1987 into one of the most successful oil service companies in the world. Gene's knowledge of the capital markets, his in-depth industry experience, and his talent for identifying extraordinary investment opportunities were hallmarks of his successful 24-year tenure as Chairman and CEO."

The press release went on to say, "Since 1987, the Company has grown from a small Alaska-based drilling contractor with 38 rigs and negative shareholder equity of $35 million to a multinational company with operations in over 24 countries and shareholder equity of more than $5.6 billion. The stock price was $0.37 per share in 1987 and increased 50-fold over Mr. Isenberg's tenure."

As Anthony G. Petrello, Isenberg's long-time right-hand man, becomes CEO, greed in corporate America has never been higher. Isenberg received the $100 million payment because another CEO was appointed. If he had resigned or retired on his own, he would not have received $100 million. Something seems amiss here.

There is nothing wrong with a CEO earning money for performance, but Nabors has done nothing for ten years. If you look at the past ten years, Nabor's share price has returned 13.35%. That is less than the 14.67% for the S&P 500 over the same period of time, and it gets even worse in shorter time periods.

The company measuring his share price over the past 24 years is laughable. What about the past, one, three, five or ten year time horizons? Is that not to be scrutinized, both good and bad? During the 1990's, equities experience one of the largest bull runs in history, as the dot com bubble and the rise of the Internet lead to absurd valuations across a number of sectors.

Part of the problem with executive compensation is that it almost is always an issue when companies annual shareholder meetings come up, but large mutual funds and other institutional funds have a much larger say on this matter, than say the guy at home with 1,000 shares. If companies do not want an issue to come to light, then they speak with their major investors and get them on their side. One hand washes the other in this case.

Nabors has never hid the fact that Isenberg was due $100 million upon appointment of another CEO, but large shareholders do not care, if they get what they want.

The Obama administration has talked about "golden parachutes", and this is a prime example of a severance package so astronomically large, that is boggles the mind. Again, this is not an attack on capitalism. CEOs like Steve Jobs and now Tim Cook of Apple (NASDAQ: AAPL), Jeff Bezos of Amazon (NASDAQ: AMZN), Louis Camilleri of Philip Morris International (NYSE: PM) and others have been worthy executives, and are due the compensation the board has decided on giving them.

Ultimately, a CEO's responsibility is to keep the company growing, and make sure the share price does the same. After all, shareholders own the company, not the CEO.

Let us know what you think. Does executive compensation need to be changed drastically?