Anyone following the BlackBerry saga (tragedy?) is likely aware of Monday’s preliminary offer by its largest shareholder Farifax Financial (which is headed by former BB director Prem Watsa) to take the company private for $9-a-share, or $4.7 billion.
However, the public might not know about the enormous severance packages BlackBerry executives stand to gain if they depart following a sale of the company. Thanks to the change-in-control provisions in their employment contracts, BlackBerry’s five highest paid executives stand to walk away with more than $80 million in severance payments (based on former equity valuations). In fact, according to the company’s most recent Management Information Circular, CEO Thorstein Heins alone stands to earn a severance package once worth more than $55 million in the event of his termination after a takeover.
These astounding severance packages, or ‘golden parachutes’, are common practice with CEOs at large public companies. In this case, however, what’s interesting is just how drastically the severance packages at BlackBerry have changed over the past year. Just one year ago, Heins would have received a severance package totaling approximately $21 million in the event of a termination and sale. In 2013, this amount more than doubled. These changes occurred in the same year that the company announced that it had created a special committee that would explore “strategic alternatives”, which the company detailed could include, amongst other things, possible joint ventures, strategic partnerships or alliances, or a sale of the company.
How did this happen? Primarily due to a drastic recent change made to Heins’ employment agreement. The board decided to take an extremely unorthodox approach to the grant of long-term incentive awards, by granting approximately three years’ worth of equity in one fell swoop.
Specifically, in March 2013 the BlackBerry board created a sub-committee (consisting of directors Barbara Stymiest, John Wetmore, and Mr. Watsa) to review the CEO’s compensation structure. The company stated that the “review was initiated because the Board believed that the existing CEO compensation structure could be further improved to better meet the Company’s compensation objective of fostering a longer-term focus on the development of the business and growth of shareholder value.”
Following the review, the board elected to raise Heins’ salary by 50% as well as his target bonus and grant him enough stock to cover his long-term awards for 2014 through 2016. This equity grant consisted of time-based restricted stock with a value of $22.5 million and performance-based restricted stock with a value of $11.25 million, which was to vest based on EPS achievement through 2016.
However, under his employment contract, these time- and performance-based vesting requirements lapse and all of Heins’ equity awards become fully exercisable if BlackBerry gets taken over and he is terminated without cause or resigns with good reason. This approach is commonly referred to as “double trigger” vesting acceleration because two events (the takeover and the executive’s departure) must occur before the vesting requirements dissolve.
When taking the entire one-time equity award into consideration, Heins’ total compensation awarded during fiscal year 2014 would be a whopping $40.5 million. Considering the immediate vesting of all equity awards that would result from a termination and sale, one can see how the one-time grant of three years’ worth of equity translates to a monstrous $55.6 million dollar severance payout.
For perspective, consider that during fiscal year 2012, the three highest paid CEOs from the 100 largest public companies in Canada received approximately C$49.1 million, C$18.8 million and C$18.7 million, based on data provided by the Globe and Mail .
In the MIC, the board stated its belief that the new pay package for Heins “will support retention of the CEO over a critical period of time for the Company, create a strong pay-for-performance orientation and ensure that the CEO does not profit disproportionately to the value that is created for shareholders.”
Since the board ratified Heins’ new deal, however, the results for shareholders have been poor. The rollout of the BlackBerry 10 devices fails and the phones don’t sell well enough to quell market fears about the company’s future. In August, the company announces it is open to a possible sale. In September, it announces a quarterly loss of $1 billion, lay-offs for 40% of its workforce and plans to refocus on the enterprise market.
And did we mention the company’s share price is currently below $8.50, down from a 52-week high of C$18.32—reached in January 2013—and down from an all-time high of C$230.52?
As Fairfax’s offer appears to be in a fledgling stage and as BlackBerry’s board has not responded to it in any fashion, there is no telling whether Heins and his executive team will actually benefit from a takeover with the share price at current levels (i.e., levels where almost no long-term shareholders are in the black). However, shareholders may take this opportunity to reflect upon whether the board’s decision to subject the entirety of Heins’ three-year equity award to the accelerated vesting clause in his contract was in their best interests.