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Firing of COO Henrique de Castro Shows Yahoo! Needs to Start Home-growing its Talent

By Paul Hodgson - Jan 16, 2014 at 4:43PM

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Sometimes new hires don't work out. And sometimes these mistakes are very expensive for shareholders.

The announcement that Yahoo!'s (NASDAQ: YHOO) very expensive COO hire – Henrique de Castro – is being fired is yet another reminder that outside hires often work out very poorly for boards and very costly for shareholders.

De Castro received a $1 million cash hiring bonus on his appointment. He'll get to keep that. Some of the $18 million of restricted stock units (RSUs) will be forfeited because they vest outside the 12-month period following his termination. But most have vested or will continue to vest. A quarter of the $18 million performance stock options will be forfeited, and others may not vest if the performance targets (based on revenue, net income, and free cash flow) are not met. All $20 million of make-whole RSUs will vest immediately.

Make-whole payments undermine executive pay practices

The concept of make-whole payments makes a nonsense of executive compensation practices. Stock is awarded to reward performance over the long term and to retain executives. If they leave, then they are not "leaving it on the table," they are simply forfeiting it because they are not being retained and they are not contributing to long-term performance. If, then, it is simply replaced by the hiring company, this undermines the purpose of these awards yet further.

There are a couple of statements in the company's most recently available proxy statement that the board may be regretting. "The Board believes that ... Mr. de Castro [is] uniquely qualified and bring[s] a set of skills and experiences that are ideally suited to address the Company's current challenges and position the Company for long-term growth." In describing the golden hellos, it continues: "The Board and Compensation Committee view these one-time costs as prudent investments for the future of Yahoo!...."

Yahoo! not the only one

Yahoo!, of course is not alone in making poor hiring decisions and then regretting them, but note, it is always shareholders who are left with the bill. Other disastrous golden hellos include the signing bonuses paid to Leo Apotheker when he became CEO of Hewlett-Packard (HPQ 0.96%), only to be ousted in 2011 just 10 months after his appointment.

Then there was Ron Johnson's hire by J.C. Penney (JCPN.Q). This included a huge buyout of the stock awards he left on the table at Apple (around $50 million), with similarly poor results. He was terminated less than two years after his appointment.

Another expensive hire was Don Mattrick at Zynga (ZNGA), again costing around $50 million; while he is still there the appointment has not worked out that well for shareholders because stock at the gaming company continues to languish much where it was when he joined.

Yahoo! CEO Marissa Mayer signed off de Castro's hiring letter with "Start practicing your yodel!" Perhaps it's time that the board began to promote people who already know how to yodel.

Paul Hodgson has no position in any stocks mentioned. The Motley Fool recommends Yahoo!. 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.

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