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This note was prepared by Professors Kenneth A. Merchant (University of Southern California) and Wim A. Van der Stede (London
School of Economics) for the sole purpose of aiding classroom instructors in the use of the Golden Parachutes case. It provides
analysis and questions that are intended to present alternative approaches to deepening students comprehension of business issues
and energizing classroom discussion.
Marshall School of Business
University of Southern California
Golden Parachutes?
Teaching Note
Purpose of Case
This case illustrates the functioning of a compensation committee of a corporations board of
Suggested Assignment Questions
1. Is the proposed severance agreement in the best interest of:
a. The executives included in it?
b. Database Technologies, Inc. (DTI) and its shareholders?
c. A company that is acquiring DTI?
2. Should the compensation committee approve the severance agreement as is? Should some
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
368
Case Analysis
Except when this case is used in classes comprised of board-savvy executives, it is likely that
The Compensation Committee
DTIs compensation committee is a subcommittee of the companys board of directors.
The Severance Agreement
In this case, which presents a disguised version of a real situation, the CEO asked the
compensation committee to consider the adoption of a severance agreement for top executives.
There was some short-term urgency because a larger company was considering acquiring DTI.
Issues for Discussion
The case presents many issues for discussion, most of which are described in the case from the
point of view of one of the compensation committee members.
1. Benefit to the DTI shareholders
(Suggested assignment Question 1.b.)
369
2. Benefit to the acquiring company
3. Conflict of interest
It is interesting to note that the request for consideration of a severance agreement came
4. Cost
The severance payments, if they were made, would total about $12 million. This cost would
be borne by DTIs shareholders because the acquirer would be aware of the need to make
these payments and would presumably reduce the acquisition price.
The key cost schedule is shown as Exhibit 1 of the case. About 14% of the total cost is
5. Fairness
a. The $12 million would be paid to just five individuals, most of whom were already
wealthy.
b. DTI had not performed very well in recent years. Why should these individuals be
rewarded so handsomely when DTIs shareholders had not benefited much from their
efforts?
c. Other employees jobs were also at risk. Why were they then not specifically included
in the severance agreement?
d. Many other corporations have implemented severance agreements like the one proposed
6. Reflection on the effectiveness of DTIs board
(This discussion is related to addressing suggested assignment Question 3.)
It is important for students to understand the pressure board members face to go along
with a majority (on the full board or on a committee). Dennis can raise his concerns at the
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
370
court. That is often the first question that board members askIf taken to court, will we be
found in violation of our fiduciary obligations of duty of care, duty of loyalty, duty of good
faith, and duty not to waste, as described in Chapter 13 of the book.
But, should board members have a higher sense of responsibility? Is adoption of the
severance agreement in its current form the right thing to do? Are the concerns here so
significant that a board member should press the argument forcefully in the committee
Pedagogy
With an experienced audience, such as a group of board members, this case can be taught as a
vignette. If issues like board roles and the functioning of the golden parachutes tax do not
