It's an important question, whether William McComb simply left Fifth & Pacific (NYSE:KATE) or was "terminated" without cause. In fact, it's a $22.5 million question.
The company (formerly known as Liz Claiborne) – which is changing its name to Kate Spade & Co., thus, I'm guessing, making McComb's clothing allowance perk fairly redundant – has decided that it terminated McComb without cause, triggering continued vesting of his stock options (incurring $16 million of non-cash severance charges) and a cash payment (of two years' salary and bonus) of $6.5 million.
Golden parachutes are for protection
Golden parachutes are put in place to protect executives in the event of major changes to a company that might result in them losing their job. Boards want their leaders to be able to make those decisions, without fear of income loss, because they might also be to the benefit of shareholders.
The market's initial reaction to this news was not positive in extended after-hours trading. But it's early yet, so it's difficult to say if this restructuring and renaming will be in the interests of shareholders ultimately.
So, in some senses, this payment is just a cushion for McComb, allowing him to make the decision to restructure the company and give the CEO position to someone else. He has, after all, been working toward this end for the last seven years, jettisoning underperforming brands from the former Liz Claiborne until the company is left with just one profitable one – Kate Spade – thus the name change.
My point, however, is that since this has all been known for some time, it is hardly a surprise for McComb, who, having had a long career at Johnson & Johnson (NYSE: JNJ), doubtless retiring with a handsome pension, simply doesn't need the cushion.
Is McComb worth the money?
I'm not saying that McComb doesn't deserve compensation for the turnaround of the company. Just a few years ago, the stock price was languishing around $2 and now it's up around $30. Then again, when he joined in 2006, the stock was up around $40 and dropped precipitously to that approximately $2 over the next two years. Shareholders – if there are any leftover from those owning shares in 2006 – are not back where they were yet.
What I am saying is that in an engineered and organized departure such as this, cash severance is a waste of shareholders' money. And if you check the proxy statement you can see that there are no provisions, or so it would seem, for McComb simply leaving, like in a retirement or resignation. There's termination for "good reason/no cause" (he gets paid), or "death," or "disability," or "change of control" (he gets paid). What happened to a simple resignation?
Why can't McComb simply resign?
If there had been some mechanism for McComb to simply resign rather than be "terminated for no reason" as the lawyers will have it, then at least shareholders would not have had to pay him any cash severance.
Sure, if he had resigned, he might still get to keep the stock options and exercise them when they're due, if they're still profitable -- he's got plenty that are underwater (strike price higher than current stock price). So the non-cash charge, the $16.5 million, would still have to be dealt with, but that piece seems like value for money.
The next step
Want to figure out how to profit on business analysis like this? The key is to learn how to turn business insights into portfolio gold by taking your first steps as an investor. Those who wait on the sidelines are missing out on huge gains and putting their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you what you need to get started, and even gives you access to some stocks to buy first. Click here to get your copy today -- it's absolutely free.
Paul Hodgson has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.