Monday, January 26, 2009

Severance Payments- An Issue of Size or Accounting?

The past several weeks have seen an unusual increase in the number of severance agreements that are being put together as soon as an executive announces his resignation. I blogged on the severance package at Maidenform last week that included executive outplacement services in addition to a lumpsum cash payout and other benefits.

Some of these severance agreements have also been entered into the same day as the resignation date.

H&R Block had a similar situation that was revealed by the company's 8-K filed on January 23rd. In the filing, H&R Block announced the resignation of Steven Tait, President of its subsidiary "RSM McGladrey Business Services, Inc." on January 21st. On the same day, H&R Block entered into a generous Seperation Agreement with him. Under this agreement, Mr. Tait will not only receive a lumpsum cash amount of $827,668 but will also be entitled to a short term incentive bonus for 2009 ( this inspite of Mr.Tait retiring in April of 2009) as well as full vesting of his 163,788 options as well as other outstanding share options.

Is this an obscene amount? Probably not in a market and economy that is anything unlike the one we are facing today... but in a situation where every industry and sector is clinging on to its dear life, the last thing we need is another well padded severance package for an already wallet fattened executive.

Other than the fact that such large payments stand out like sore thumbs, (gold digits nevertheless!), what I would like to understand is how do these companies just charge such expenses? Aren't these expenses to be planned out, provided for in the books and then charged off against the provision? How do you meet your forecasts with charges like these cropping up at the drop of the hat. H&R Block had a similar situation when Mr.Mark Ernst resigned as Chairman, President and CEO of one of its subsidiaries' HRB Management, as well as with the resignation of William L. Trubeck the ex-CFO at the end of 2007. Mr Ernst was paid a lump sum cash severance payment of a whopping $2,550,000 in addition to other benefits and Mr.Trubeck an amount of $900,000. As in the case of Mr. Tait, the severance agreement was entered into on the same date as Mr. Ernst's resignation date and in the case of Mr.Trubeck the severance agreement was dated after the resignation date but before his termination date.

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