HP Sued Over Ex-CEO Fiorina's $42 Million Severance Payout

Pension fund investors filed a suit against Hewlett-Packard directors on Tuesday, calling "excessive" the $42 million severance package plus other perks paid last year to fired chairman and CEO Carly Fiorina.

The action was filed in U.S. District Court in Northern California by Indiana Electrical Workers Pension Trust Fund and pension funds administered by the Service Employees International Union.

The suit alleges that HP's board breached company policy last year by granting a payout to Fiorina that exceeded 2.99 times the sum of an executive's base salary, plus target bonuses, without seeking shareholder approval.

That HP policy had been put in place in 2003 after shareholder dissent over a $16 million payout to former HP president Michael Capellas, who had been in the position for only about seven months, according to a statement released by law firm Grant & Eisenhofer, which is representing the two pension funds in the new lawsuit.

When Fiorina was terminated in February 2005, she received a severance of $21.4 million, plus stock options and other bonuses that upped her exit package to about $42 million, according to Grant & Eisenhofer. Although that package exceeded HP's 2.99 formula, no shareholder vote was sought to authorize the payout, the suit charges.

John Challenger, CEO of executive recruitment firm Challenge, Gray & Christmas, says he has seen severance payouts larger and smaller than the one given to Fiorina. "Severance packages are all over the map," he says.

However, even though HP had adopted a policy that limits severance packages to no more than 2.99 times salary and bonuses, Challenger says it's possible that Fiorina's exit package was something negotiated before she joined the company, which is often the case for CEOs when they take the job at many top companies.

"CEOs know their days are numbered as soon as they're hired, so they negotiate the numbers while they can," he says. This tactic often helps companies attract "the top people to the top job."

Also, although Challenger doesn't think this applies in the HP suit, in general "pension funds are questioning CEO compensation much more" now than in the past, especially as many companies are making changes to their pension plans that make their workers feel less confident about their own financial security when they retire.