Yahoo COO Exit – Severance – Stock Options & Dead Presidents

henrique-de-castro-yahoo-coo-1By David Nelson, CFA

After just 15 months on the job, Henrique de Castro, Yahoo’s Chief Operating Officer is being shown the exit. Rumors have been flying that he might be forced out and now it seems that will be as soon as today. Henrique was one of CEO Marissa Mayer’s first hires. Coming from Google (GOOG) it was believed Mr. De Castro was responsible for building their display add business and was tasked with working his magic at Yahoo (YHOO). Unsatisfied with results, Ms. Mayer is throwing in the towel and has fired her No. 2.

Public Companies Need to Re-Think Severance Packages

Look, these things happen and Yahoo (YHOO) will move on and find new talent. The problem and message here is not about an employee being let go. That happens all the time. Public companies need to re-think severance packages agreed to at the time of hiring. Boards need to be more responsive to shareholders because in the end, that’s who they work for.

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Stock Options vs. Dead Presidents

In the case of Mr. de Castro, the Wall Street Journal reports that his severance package alone could be worth North of $42 Million. Most of the award is in stock and therein lies the problem. Boards at public companies continue to issue large pay and severance packages in the form of stock options or restricted stock units. I doubt we would be seeing such large awards if they were forced to cut a check. It’s easy to offer big bonuses and severance when you’re not using paper with a Dead President’s picture on it.

Stock options have become the favorite form of compensation for boards because it doesn’t hit the wallet today. However, eventually the company will have to use corporate cash and buy back shares to avoid the earnings dilution from the issuing of options. Eventually, those options get converted into stock.

Just last month, I wrote about the Freeport’s (FCX) board lavishing an upfront severance package of $36 Million on CEO Richard Adkerson for fear he might leave. He’s 66 years old and likely to retire soon. This was little more than a Christmas Gift from the board to their CEO. (Click here for my interview with Yahoo’s Matt Nesto)

The common rationale given by management at many public companies is the following; stock options align pay with shareholders interest. There are numerous studies that show stock options actually contribute to risk taking behavior. In addition, it is one of the single largest contributors to the gap in pay between top executives and workers. As you might expect those who defend stock option grants the most, are those who receive them.