Another corporate scandal, another CEO ousted and another eye-popping, multimillion-dollar severance package.
News that former Hewlett-Packard Chairman and Chief Executive Mark Hurd will get severance payments worth an estimated $28 million despite being ousted in a scandal revives a question asked after nearly every outbreak of corporate misfeasance: Why?
A rank-and-file employee let go for fudging expense accounts or otherwise violating company policy likely would be given time to clean out the desk and little more. But senior executives like Hurd play by a different set of rules, often hammered out years earlier by expensive lawyers.
“Exit packages are often negotiated on an executive's entry into the organization, at a time when he or she is still very much in a position of power as the leading candidate for the job,” said Richard Coughlan, associate professor of management at the University of Richmond's Robins School of Business.
“At that time, the compensation committee of the board of directors is probably thinking that there is little or no chance of things going south, so it might be willing to be more generous in that section of the contract," he said. “Unless the contract has been worded very carefully, the company is forced to honor the package that had been agreed to up front.”
Hurd resigned unexpectedly Friday after a company investigation of a sexual harassment claim found that he filed inaccurate expense reports to cover up what was described as a "close personal relationship" with a company contractor. Over the weekend he settled the harassment charges brought by the contractor, actress Jodie Fisher, who helped the company with marketing events from 2007 to 2009.
HP's general counsel said Hurd's actions showed a "profound lack of judgment." Yet Hurd will get a $12.2 million severance payment plus nearly 350,000 shares of HP stock worth about $16 million at Friday's closing price, according to a company filing. The company also extended the deadline for exercising options to buy up to 775,000 HP shares.
“I think this is an abuse", said Rick Wartzman, executive director of The Drucker Institute at Claremont Graduate University. "If not an abuse by the letter of the law, it’s certainly an abuse in terms of a societal context and a common sense context."
Yet news of an ousted corporate executive getting a big payout is hardly unusual.
BP’s beleaguered CEO Tony Hayward left with severance of about $1.6 million — modest relative to other payouts — but it came along with a pension valued at around $16.8 million. General Motors' chief executive Rick Wagoner received a package valued at more than $10 million when he was pushed out by the Obama administration.
Robert Nardelli created a huge uproar when he received a severance package valued at $210 million after he was forced out at Home Depot in 2007. It is unclear what he received when he left privately held Chrysler following its trip to bankruptcy court and Fiat partnership.
Stan O'Neal walked away from Merrill Lynch with about $160 million in stock, options and retirement benefits after he was ousted in 2007 as the company's business was spiraling downward.
In many cases, an executive would have to be convicted of a felony before forfeiting an exit package, said Alan Johnson, managing director of Johnson Associates, a New York-based executive pay consulting firm. “You can do a lot of bad things and never be convicted of a felony,” he noted.
That doesn’t mean directors can’t try to deny a severance package to an ousted officer. But picking a fight with a former CEO can be a dicey proposition, Johnson said.
“He probably knows a lot of dirt about a company and can bring that out," Johnson said. "Maybe we’ll find out a director has a drinking problem,” he explained.
Such a battle could damage a company’s reputation and take up the time of managers or directors who need to be deposed if the case goes to court, not to mention legal fees.
Johnson said many companies have tightened the language on executive contracts in recent years. “Generally the standard we put forth is if we catch you stealing or committing fraud you get nothing,” he said.
So will better contracts stop ousted CEOs from getting big payouts?
“Yes and no,” said Karen Dillon, editorial managing director of the Harvard Business Review, and the publication’s in-house expert on executive compensation.
“We’ve had this same conversation in and out of other recessions,” she said. “At the end of the day, companies are eager to recruit talent, so if you want someone world-class, it’s a tricky dance.”
Hurd’s lucrative payout comes at a particularly bad time, said the Drucker Institute’s Wartzman. Millions of Americans are out of work, including thousands who here laid off from HP under Hurd’s leadership, and at the same time an executive who broke the rules is getting a windfall, he said.
“It’s adding insult to injury,” said Wartzman.
“Hurd was a guy who won kudos on Wall Street turning around HP,” Wartzman said, “but his formula was to acquire and slash payroll. On a human level, there’s something wrong with laying people off and walking away with a princely sum like that.”
Msnbc.com's Allison Linn contributed to this story.
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