Former Sprint CEO's severance could top $38M

Golden parachutes like the one for Dan Hesse are 'pre-nuptial agreements for execs,' says one analyst

Former Sprint CEO Dan Hesse could receive more than $38 million in severance pay, including cash, benefits and Sprint stock.

The price for Hesse's golden parachute might seem high, but it sits at the average level of what major technology companies offer CEOs in exchange for their willingness to take on the job.

Dan Hesse

Sprint Nextel CEO Dan Hesse at Mobile World Congress in 2013.

"At the CEO level, to attract top talent, you have to build in a golden parachute," said Rob Enderle, principal technology analyst at Enderle Group. As a tech CEO, "there is a lot of running a complex system you didn't build and have no deep knowledge of on day one, surrounded by people who think they deserved the job more. Your chance of success is below 50% if you are joining a troubled company."

The average severance package for a departed CEO was $29.9 million in 2013, according to professional services firm Alvarez & Marsal, which also determined that the amount paid CEOs who leave is on the decline.

Hesse, 60, could receive a lot more than $38 million, depending on factors not included in the latest Sprint proxy filing from late June; it tabulates the value of his severance pay as of March 31. Future Sprint financial filings after the end of the current quarter may provide more details.

As of that March 31 tabulation, Hesse would have received $56.1 million upon termination, based on a Sprint stock value of $9.19 on that date, according to a chart in the filing.

Hesse's last day was Monday, when Sprint's stock price was $5.76, well below the $9.19 price on which his severance is based. Nearly all of the $56.1 million value was based on $48.3 million in long-term incentive awards made up of Sprint stock options and restricted stock. The other portion included two times his annual salary of $1.2 million and short-term benefits.

At the $5.76 stock price, Hesse's stock value in the severance package would drop to $30.2 million. Adding in double his annual salary and benefits, the $30.2 million could reach $38 million, assuming no other changes.

The proxy statement also notes that Hesse was paid $49.077 million in 2013, including $27.78 million in stock awards. He earned $313,000 in the first three months of 2014; earnings for the most recent quarter have not yet been reported. Among his benefits, Hesse had the use of a private jet for business and non-business travel for him and his family.

Hesse's severance package and compensation is a prime example of what analysts said is a trend in American business of rewarding CEOs without much regard to actual performance. The usual corporate line is that compensation and severance packages are the only way to recruit talented executives. But one analyst said that such packages merely subsidize potential failure.

Sprint's proxy statement includes a lengthy defense of how Sprint established a metric for rewarding Hesse and other executives, mainly for increasing the number of wireless Sprint subscribers and raising cash.

In Hesse's case, he was well regarded as a steady hand who raised cash, even though company revenues fell for the last five years. Sprint also saw overall subscribers drop from 47.063 million in June 2013 to 45.7 million in June 2014.

Sprint's compensation advisors said they measured their compensation and severance on benchmarks against 12 other companies, including AT&T and Verizon Communications. Such a practice only perpetrates large golden parachutes and high CEO salaries, analysts noted.

The proxy statement also notes Sprint's successes in 2013 under Hesse (when he earned $49 million), including the successful merger with SoftBank, now in control of 80% of Sprint; the shutdown of the iDen network, first obtained under the merger with Nextel; and the acquisition of Clearwire (formerly devoted to WiMax technology) to give Sprint full access to 2.5 GHz spectrum.

It was important that Sprint reward Hesse handsomely in 2013 when the SoftBank merger was finalized to keep him and other executives from leaving the company, analysts said. Also, Sprint was in the midst of a major network upgrade to LTE in 2013, and SoftBank would hope to retain him for his knowledge of that transition.

"The question of whether Hesse did great things to deserve his pay [and severance] is subjective," said Gartner analyst Bill Menezes. "He inherited a mess when he was hired as CEO [seven years ago] in dealing with Nextel, WiMax and no LTE roadmap and he dealt with all three. Post-SoftBank merger, it's clear that the new owner brings a different corporate culture and strategic vision than Hesse's to the organization."

To replace Hesse, Sprint tapped board member Marcelo Claure, founder of the successful Brightstar, now the world's largest mobile device distributor and a subsidiary of SoftBank.

The only way Sprint or any other company could avoid paying Hesse or another CEO a large severance is by proving gross incompetence or illegal activity, said Jack Gold, an analyst at J. Gold Associates.

"Think of golden parachutes as pre-nuptial agreements for execs," Gold said. "That said, the wisdom of such packages is open for debate. Do the stockholders get good value from severance deals? Often not. But nobody wants to be CEO without such a package, and it's commonplace in the industry. Most board members see severance packages as normal, so I think we're stuck with them."

In the case of Hesse, the big institutional shareholders that held onto Sprint stock before the SoftBank merger are probably still applauding Hesse for making the sale and won't even notice his golden parachute.