Moving up by moving on down the road…
The employment agreement filed Tuesday for Walter Rakowich, President and COO of ProLogis (PLD), notes that his employment “shall terminate upon his death.” I’m glad the lawyers made that clear, because I’m not confident he’d exhibit the proper work ethic at that point.
In addition to stating the obvious, the contract gives Rakowich the right to quit, with full severance pay, if his office relocates “more than 30 highway miles” from the desk where he now sits and sips his lattes. A nice thing for him, but not at all unusual. As Footnoted’s readers may know, employment deals routinely contain the right to a payoff if an executive chooses to resign for what’s called ‘Good Reason”: a cut in pay, a request to perform duties unbefitting a bigshot — or a move to a new workplace that’s more than a specified distance from the current one.
We’re not talking relocation to China here. The magic number is quite commonly in the range of 30 to 50 miles.
Rakowich’s contract isn’t insanely generous and ProLogis stock got some good press this week, so I’ll stop picking on him. Instead, let’s pick on Richard Wohl of IndyMac, whose behemoth of a contract Michelle footnoted on Friday. If Wohl’s office were to move, say, 51 miles from where it is now, he could politely decline to go along and instead reap $3.5 million or more in cash, immediate vesting of his equity awards and his entire wad of severance benefits, including the 10 years’ medical/dental/vision coverage for his entire family that Michelle mentioned. (Wohl’s contract, I’ll note in passing, contains enough material for a week of posts, if not its own HBO mini-series.)
Sure, packing up your coffee mug and family photos is a nuisance. But these relocation clauses, which treat moving a few exits down the highway like a forced transfer to the Far East, seem kind of nutty.
RSS
September 28th, 2007 at 3:52 pm
Interesting, I didn’t know that, so moving the office 40 miles can be legally equivalent to a ‘constructive termination?” Wow.
What is a “highway mile?” Is that like a nautical mile but on land; a.k.a., a mile. Could 35 geographical miles be more than 35 highway miles? Oh wait, could this be: the office relocates 15 *straight* miles but the exec would have to take a roundabout freeway such that it equals 30+ “highway” miles…if that’s true, the company should counter with “the lesser of [walking distance], [subway minutes], [highway miles], and [jetpack flying time]“
September 28th, 2007 at 5:06 pm
Well, at least Dick isn’t going anywhere soon, not if he wants that equity to be worth a dime.
September 28th, 2007 at 8:53 pm
The “50 mile” radius provision is routine and quite common among senior executives and certainly not just CEOs at least in the Northeast. While 50 miles may not seem much in some parts of the county, moving your office from Stamford, CT to say, Short Hills NJ makes it entirely a new job. Plus 50 miles here may equial 2 hours of commuting time (seriously).
If companies are willing to pay (overpay?) to attract talent, its fair for the executives to negotiate to get the best deal they can.
September 29th, 2007 at 1:03 pm
Dan, good point, easy to forget if you don’t have much of a commute. Two things strike me about this routine clause: (1) it appears asymmetric with rank-and-file; employees of IndyMac who drive far to work likely aren’t reimbursed. I mean of course employees won’t have same perqs, but (I am rusty, I may be wrong) employees get no economic consideration on the same factor. (2) If a provision like above is justified, and it may be, then it explains why investors don’t really care about ‘excessive’ CEO/executive perqs. In the above case, it would be cheaper to buy a helicopter, if needed. (It might almost be cheaper to invent a teleporting device than trigger the constructive termination). The implied premium on the executive’s time, and the value of retaining him/her far exceeds the cost of any/all extravagant perqs.
September 29th, 2007 at 4:45 pm
yeah, I was thinking she must not live in NY or LA. 30 miles takes an hour and a half to two hours driving here in LA. LA and Orange County are on two different planets entirely. Even run of the mill employees get lots of concessions for a 30 mile move. They already drive an hour each way, generally. That’s two hours per day. They’d have to sell their house or spend three to four MORE hours on the freeway daily than they do already. That’s constructive termination in my book.
September 30th, 2007 at 3:33 pm
Thanks for the comments. This subject does have nuances I couldn’t cover in a 350-word post. I’ll try to flesh out my thinking a little more. First, I live in NYC and believe me I understand the traffic issues! But these boilerplate clauses are used in all sorts of geographic locations; e.g., a quick check of last month’s filings showed 30-mile triggers operating in western Pennsylvania and northern Indiana. (Perhaps these are traffic-plagued areas, but I feel entitled to assume not until it’s proven otherwise.)
Second, even where the mileage change is meaningful, I’d take issue with the constructive termination treatment, because a move is different from something like a pay cut. Presumably a move happens for a good business reason, yet the executive has basically been given a put on his job that’s exercisable if he’s asked to relocate. Investors are constantly told that compensation is all about retaining people integral to the company’s success (which is how these clauses get into contracts in the first place), but many firms are giving away in advance their bargaining power in a relocation (as David said, there are cheaper ways to address the problem), and they’ve created an incentive - a very attractive one in some cases - for the exec to leave rather than stay. Surely there’s a better way to deal with this issue.
Also, with respect to rank and file employees, I’m guessing they’re more often given incentives to move than incentives not to move. If they’re getting constructive termination deals in L.A., I’d be interested to know that.
October 10th, 2007 at 11:21 am
I agree…………