Triad Hospitals' pending acquisition of Quorum Health Group may put Quorum's chief executive officer, James Dalton, out of a job, but his fall from the executive suite most likely will be cushioned by a golden parachute that Quorum's board of directors regilded after the company began seeking buyers last summer.
Dalton's parachute and those of Quorum's other top executives, worth millions of dollars each, will be triggered when Brentwood, Tenn.-based Quorum changes hands. Triad officials say they expect to complete the Quorum purchase in late April. Executive compensation experts say the amount Dalton will receive at that time falls within the range of what CEOs in other industries generally receive in such arrangements. But he and the other executives would have received much less if Quorum's board had not amended their compensation agreements last August.
A golden parachute refers to the compensation package an executive receives if a company is taken over by another firm, resulting in the loss of the executive's job. It can include generous severance payments, stock options or a bonus paid when the executive leaves.
Typically, a few top executives receive a multiple of their salary and bonus-and their stock options are converted to cash-when a company changes control. According to executive compensation experts, top executives often will receive the equivalent of up to three years' salary. Above that rough three-year multiple, the Internal Revenue Service has established hefty taxes on severance payments.
"The original impetus for having change-in-control provisions was to keep top executives focused on the business at hand at a time when otherwise their minds might be straying toward personal matters, as far as where they were going after they were let go," says Ted Jarvis, an executive compensation consultant at management-consulting firm Towers Perrin in Los Angeles. "It will allow them to think in the best interest of the shareholder without having to think of their own self-interest first."
Under Quorum's executive employment agreements, Dalton will receive a severance payout of $1.97 million, based on his salary and bonus amounts. A far larger percentage of his parachute, however, will come from his stock options, which under the merger agreement with Dallas-based Triad
will vest upon closing of the deal. Quorum estimated the value of those stock options at $6.5 million in a filing with the Securities and Exchange Commission.
These kinds of payouts-which in the mid-1980s were often used as poison pills to prevent hostile takeovers-can actually encourage acquisitions, says Judith Fischer, managing director of Executive Compensation Advisory Services, a research firm that analyzes filings on executive compensation.
"Basically, golden parachutes were initially put together to protect executives on one hand who may be of a certain age and who may not be employable again," she says. "The second reason was to establish a reason for executives to keep their noses to the grindstone, and the third was to afford the company some stability in a time of instability."
However, when the value of the parachutes soar, they can act as an incentive for an executive to sell a company.
What Dalton would reap from the deal with Triad pales in comparison with some of the amounts healthcare executives received during the mid-1990s wave of mergers. For example, Robert O'Leary, as chairman and CEO of American Medical International, had agreements to pocket nearly $10 million in cash and stock when National Medical Enterprises bought AMI to form Tenet Healthcare Corp. in 1995. And Charles Martin Jr., now chairman, president and CEO of Vanguard Health Systems, Nashville, received $45 million in compensation when he gave up his CEO post at OrNda HealthCorp in 1997 after Tenet's acquisition of the company.
Quorum spokeswoman Shea Davis describes Dalton's payout as "standard in the industry" and declined to discuss why the company's board of directors opted to change his severance agreement last August.
She says the decision was not linked to Quorum's talks with Triad about selling the company, even though Triad had expressed interest in Quorum in June 2000 and Quorum had approached 14 potential buyers, including Triad, one month later. Before the amendments to Dalton's agreement, as well as to those of C. Thomas Neill, Quorum's senior vice president of corporate services, and Roland Richardson, senior vice president of acquisitions, all three would have received only two times their annual salaries instead of three.
Russell Carson, Quorum's board chairman, also would not discuss the modifications to the compensation arrangements.
Triad spokeswoman Patricia Ball declined to comment on Dalton's compensation arrangement, saying it was determined by Quorum's board of directors, not Triad's.
But Fischer says companies can raise eyebrows among their shareholders by amending executive compensation agreements when they are contemplating merger discussions.
"It's very unusual to have a company rewrite their golden parachutes during the course of dealing with a change of control," she says. "Those are the types of things corporations should have buttoned away before they go into any type of a merger document."