Back in April, shareholder groups at Pfizer's annual meeting made it abundantly clear that they'd had enough with the rich payouts to then-CEO Hank McKinnell. Groups, led by the AFL-CIO, staged a raucous protest. As they handed out fliers, chanted, and held up signs to demand McKinnell return part of his pay, an airplane circled the company's annual meeting in Lincoln, Neb., with a banner reading, "Give it back, Hank!"

The protesters were upset that one of the top-paid pharmaceutical executives was also going to be granted an $82 million lump sum if he ever stepped down.

But on Dec. 21, Pfizer revealed that McKinnell, who did give up the CEO post in 2006, is getting even more money than originally thought. He'll receive a total of $122 million in retirement, as well as deferred compensation worth an additional $78 million.

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The sum total of $200 million isn't going over too well among investors. "It's not reasonable to pay someone who failed as CEO this much; he's the poster child for pay-for-failure," says Daniel F. Pedrotty, director of the investment office of the AFL-CIO, whose member unions' funds hold about $568 million in Pfizer shares. "Unfortunately, once you've negotiated this and gotten it wrong, it's hard to fix."

The Bitterest of Goodbyes

A Pfizer spokesman says the company had "legal obligations" to McKinnell and "the employment agreement itself was entered into at a much different time in Pfizer's history." He added that the company has made subsequent changes to its executive compensation. The spokesman said McKinnell did not return messages seeking comment.

In Corporate America, the road for even the bitterest of goodbyes has long been paved with sweet financial rewards. Continuing a long-term trend, 2006 saw many companies parachuting executives into soft post-employment landings, whether leaving with head held high, like ExxonMobil chief Lee Raymond, or in a cloud of controversy like McKinnell.

But with shareholder groups up in arms about executive pay and deluxe exit packages, the era of the most gilded parachutes could be coming to an end. In July the SEC adopted changes to disclosure rules on executive and director compensation that will make the details of parting packages publicly available as never before.

The required plain-English tables will break out every perk and stock option value so that shareholders can see in plain daylight information previously not reported.

Compensation experts are divided as to how transformative the SEC changes will be. But many agree that while executives are unlikely to retire into insecurity anytime soon, increased scrutiny of farewell deals is likely to tie pay more to performance and trim some packages around the edges.

"This year could end up being the last hurrah for the more outrageous severance packages we have seen in the past," says Patrick McGurn, executive vice-president of Institutional Shareholder Services, a proxy advisory firm.

Shareholder Groundswell

Amid soaring executive pay and stock option backdating and other scandals, shareholder groups were not shy about voicing anger about pay levels and spectacular severance packages this year-and their outcry led to the SEC's vote for more disclosure.

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Sixteen shareholder proposals calling for binding votes on excessive severance arrangements were voted on in 2006. On average the proposals garnered 51.2% support, says McGurn. The high water mark was Ryland Group's 73%.

One of the year's most controversial golden parachutes was awarded to former KB Home executive Bruce Karatz. Although his luxurious pay while on the job didn't please shareholders, many industry observers thought Karatz' sound performance merited a reward.

But after an internal investigation this fall found that Karatz had chosen dates for stock options that benefited him and other executives, his $175 million going-away present seemed harder to justify. Shareholder groups who'd been fed up with a ballooning salary during good times were outraged that his retirement package was so rich.

"You're supposed to reward performance, but too often those terminated are actually being rewarded for failure," says Paul Hodgson, an executive pay expert for Corporate Library, a Portland (Me.) corporate governance research organization. "It's the idea of merit pay turned completely on its head."

Crying Foul

In a statement in November, KB Home said that its board "expressed its appreciation for Mr. Karatz's contributions to the Company and the value he has helped to create for shareholders, employees, and customers of KB Home." The company also said that Karatz had "voluntarily agreed" to pay the company the difference between the original value of options he has exercised and their revised value, as well as resetting the exercise price on options he has not yet exercised.

The company said the aggregate value of those changes is approximately $13 million. A spokesman for Karatz said he was unavailable for comment.

KB Home shareholder groups joined the ranks of those at other companies crying foul, and the SEC addressed their concerns with the new disclosure rules for executive pay, which went into effect for fiscal years ending after Dec. 15, 2006.

"With more than 20,000 comments and counting, it is now official that no issue in the 72 years of the Commission's history has generated such interest," SEC Chairman Christopher Cox said in a July statement following passage of the new regulations.

The rules mark the biggest change in proxy disclosure since 1994, when the more general "summary compensation table" was introduced, according to Jan Koors, managing director of Pearl Meyer & Partners, an executive compensation firm.

More legislation could also be on the way. Requiring binding votes on golden parachute compensation was a centerpiece of Representative Barney Frank's executive pay reform bill in the 109th Congress. McGurn says that Financial Services Committee Chair Frank is likely to push this idea again in 2007.

Radical Change Or Subtle Difference?

Compensation experts say the new SEC rules could cause companies to scale back post-employment packages, whether because of shareholder pressure or simple embarrassment at the numbers that will become public.

"The changes will have a radical impact on severance arrangements going forward," says McGurn. "You'll see boards saying, 'Listen, if we put this number in the proxy statement we'll have a shareholder rebellion on our hands.' They won't want to risk putting that out to play."

Overall, experts say, the changes in the marketplace will tend to be conservative. And as the new regulations go into effect, there is evidence that scale-backs are already taking place.

First, the packages are starting to downsize multiples from three times the executive's salary plus bonus to two times his/her salary plus bonus, says Russell Miller, practice leader for Korn/Ferry Executive Compensation Advisors. Hodgson confirms that this shift started in 2004, when about 85% of companies used three-times multiples, which slipped to 50% in 2006.

Other changes in deals negotiated now include the more frequent use of pay-curbing conditions. For example, more often contracts will have "clawbacks," which require an executive to repay funds granted if earnings are restated and revised downward. There's also increased use of "double triggers" for vesting stock options, which slow the process of vesting.

Will They Compare Notes?

Also this year, a host of companies including 3M, Chevron, Circuit City, Coca-Cola, and Prudential Financial took the initiative to create tightened-up provisions on exit packages. "The boards have ears much more open to the voice of shareholders around this issue than they did three to five years ago-or perhaps ever," says Dan Ryterband, president of Frederic W. Cook, an executive compensation consulting firm.

But some experts warn that it's important not to overstate the changes afoot in post-employment compensation trends. They argue that while we may see the rate of growth of packages slowing down, there will be no large-scale shrinking of them.

"Certainly we are seeing things that suggest that companies are trying to pull back on certain values a bit at the margins," says Koors. "But we won't see huge changes because of established market practices."

Koors further warns that more disclosure could even lead to executives and companies comparing notes, leading to competition that could have the unintended effect of inflating executive pay and post-employment packages. "The changes won't cause massive changes overnight," adds Koors. "Anyone who thinks these new rules will decrease compensation across the board will be disappointed."

Still, some shareholder groups are hopeful. "The new transparency will be a radical change because shareholders will have a real number to work with," says the AFL-CIO's Pedrotty. "So we're hopeful, but the onus will be on shareholders to continue the fight to make boards more responsive to investors' interests."

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