As reported today by CNN, United Airlines CEO Jeff Smisek received a severance package of over $36 million upon resigning from the company last September, amid a federal investigation into corruption involving the Port Authority of New York and New Jersey. The severance package included a $4.9 million dollar payout, a $1.7 million bonus, $29 million in equity-based awards, lifetime flight and airport parking privileges, and life insurance and health benefits until he qualifies for Medicare.
Executive severance packages like the one described above have come under scrutiny by federal and state regulators, shareholders, labor unions, and consumers. Not only do such excessive severance packages have the potential to be challenged in the courts, and cause public outcry, they are often ineffective in obtaining the highest-quality executives. Indeed, as one corporate researcher noted, when a company guarantees its executives large severance packages even when they perform poorly (or, as in the case of Mr. Smisek, subject the company to a federal corruption probe), it may undermine the executives’ desire to build long-term value for shareholders. “They don’t care if they are fired or not.”
In an era of high airline tickets prices, rising baggage and other fees, and smaller airplane seat sizes, United’s decision to honor this severance package is unsettling. United’s Board of Directors has the right to force Mr. Smisek to repay roughly $10.1 million of his severance pay. Doing so may alleviate some of the negative press regarding this issue going forward.