North Fork Executives to Receive
$288 Million for Capital One Deal
By JESSE DRUCKER and JAMES BANDLER
March 14, 2006; Page A1
The top three executives at North Fork Bancorp, benefiting from a little-known but popular executive perk, stand to reap at least $288 million from the large New York regional bank's $14.6 billion acquisition by Capital One Financial Corp., including roughly $185 million for Chief Executive Officer John Kanas.
While large payouts to executives are typical under many companies' change-of-control policies, the expected payouts to the North Fork executives, as estimated by executive-pay consultants, are big by recent standards. In a takeover of similar size last year, SBC Communications Inc.'s $16 billion acquisition of AT&T Corp. made AT&T CEO David Dorman eligible for roughly $32 million. Mr. Kanas's payout will rival one of the biggest ever: the more than $185 million that Gillette Co. CEO James Kilts will receive as a result of Procter & Gamble Co.'s acquisition last year of Gillette for $57 billion -- at least $95 million of which was tied directly to the merger.
The relative size of the North Fork payouts raised eyebrows among critics of high executive pay. "It's the highest golden parachute I've ever seen," said Paul Hodgson, a senior research associate at the Corporate Library, an independent corporate-governance research organization. The North Fork payments "appear to me at a level that would create an incentive for management to go looking for a change of control to trigger that payment."
A big portion of the payments to the North Fork executives will come in the form of a so-called tax gross-up -- a common fixture in executive compensation whereby a company covers the tax bill on perks and benefits of the job. In the case of the North Fork executives, most of the expected payouts will come from the accelerated vesting of restricted stock -- triggered by the merger -- plus gross-ups to cover taxes on that restricted stock.
The tax gross-up payments to Mr. Kanas alone could be as much as $111 million, according to an analysis done by Derrick Neuhauser, an executive-pay expert at BDO Seidman LLP, based on company filings. Meanwhile, the three top executives -- Mr. Kanas, Vice Chairman John Bohlsen and Chief Financial Officer Daniel M. Healy -- will also receive one-time payouts totaling about $26 million, according to Tim Ranzetta, chief operating officer at Equilar Inc., a pay consulting firm in San Mateo, Calif. Those payments are based on an average of the executives' previous annual taxable compensation.
"I know how the story looks, and it's an egregious amount of money," said Mr. Kanas, 59 years old, in an interview.
But Mr. Kanas defended the payouts, saying he was monetizing a life's work at a company. "It's not like I flew in here on a private jet three years ago and prettied up the company and then booted it out of here," Mr. Kanas said. Mr. Kanas joined the bank in 1971. He became president and CEO of the bank in 1977.
Raymond A. Nielsen, chairman of North Fork's compensation committee, declined to address the specifics of the payouts. "My sole comment would be I consider it to be a fair and appropriate package," Mr. Nielsen said.
Under Mr. Kanas, North Fork has performed fairly well among big regional banks, but the deal announced Sunday evening with Capital One -- itself trying to reduce its reliance on the credit-card business -- spotlights the hardships regional banks face as they wrestle with a difficult interest-rate environment and fierce competition for deposits. Mr. Kanas said he would receive his payout when the deal closes -- probably some time in the fourth quarter of this year.
The most unusual part of the package, according to Robert Salwen, a New York-based executive-compensation attorney and consultant, is North Fork's decision to pay all of the personal income taxes that the three men would owe on their change-in-control payments. Companies are increasingly paying and grossing-up the so-called golden-parachute tax, a 20% federal excise tax levied on most change-in-control payments that exceed three times the executive's previous taxable average annual compensation. But, Mr. Salwen said, rarely do companies "pay all the executive taxes, rather than just the 20% penalty tax… That's a handsome payday."
In comparison to the roughly $111 million in taxes the company is likely to cover for Mr. Kanas, Gillette's Mr. Kilts received $13 million in tax gross-ups, a much smaller percentage of his overall payout.
To be sure, part of the reason the payouts to the North Fork executives are relatively large is that none of the executives' restricted stock was eligible to vest until the Melville, N.Y., regional bank was taken over, or until the executives retired, or upon their death or disability. As of last year's proxy filing, Mr. Kanas also controlled North Fork shares valued at roughly $48 million based on the $31.18 per-share price Capital One is offering North Fork shareowners.
Mr. Kanas said he plans to stay on at the merged company as president of Capital One's banking business, at a salary of $1 a year to help Capital One, primarily a credit-card issuer, accelerate its move into traditional retail banking. He will also receive Capital One stock.
However, Mr. Kanas said the three top executives agreed to forfeit a $50 million payment that would have been triggered by the merger, and instead are dividing it up among the company's employees. This payment, known as the company's performance plan, was originally to equal 3% of the bank's total value, to be paid to Mr. Kanas and other top executives. But the company revised the plan last year, around the same time The Wall Street Journal sought information about the company's compensation arrangements for an article that appeared Dec. 22.
Instead of 3% of the bank's total value, which Mr. Kanas described as a "silly number," the company agreed to pay senior executives and certain other employees 3% of any premium to the price paid for similar banks, in the event that North Fork was acquired. But Mr. Kanas said he and the other executives came to believe that even that was too much, electing to give this sum mostly to employees who haven't been able to "build sizable ownership positions" at the company.
Mr. Kanas said the acquisition by Capital One would result in layoffs at North Fork, largely among the ranks of the bank's roughly 1,300 back-office staff. "Not all are going to get eliminated," he said.
Mr. Kanas, who recalls designing the company logo on a napkin over doughnuts and coffee, says he intends to use a portion of the new money to replace his Dodge pickup, which he keeps at his 25-acre farm in East Moriches, N.Y.
In addition, he says he has greater philanthropic ambitions. "My wife and I have talked about ways to… try to get more of that money into a charity if we can." He said he and his wife own a charity that supports several educational initiatives, including a private day school on Long Island. |
