Magellan Financial scraps $10 million “crazy or death” contract clause: How executive pay gets decided

Executive bonuses can be touchy topics, but one Australian fund manager has withdrawn a proposed $10 million “crazy or death clause” from the chief executive’s terms of employment that was to be reviewed at the company’s annual general meeting.

A notice of the Magellan Financial Group AGM, delivered to the ASX, included a resolution to approve a termination payout for chief executive Hamish Douglass “in the case of him becoming of unsound mind, incapacitated or dying”, subject to shareholder approval.

The payment, as outlined in the AGM notes, would consist of outstanding remuneration from the previous financial year that had not yet been paid, the pro rata value of his salary in for the year that work stopped, and 200% of the fixed remuneration amount to the value of $10 million.

However, after the Australian Shareholders Association said they would vote against the proposal, the resolution was withdrawn from the AGM on Tuesday ahead of today’s meeting, according to Fairfax.

In a note to the ASX Magellan said “Mr Hamish Douglass has requested that the board withdraw the proposed Resolution 4”.

The Australian Shareholders Association said it believes “it is ridiculous for the company to commit to the cost of the cover in circumstances where it will not receive any benefit,” according to Fairfax.

What is a “crazy or death clause”?

McDonald Murholme Principal Lawyer Andrew Jewell told SmartCompany this is the first time he has come across a “crazy or death” clause in an employment contract.

“I would say it’s quite rate – I have never seen this before,” he told SmartCompany.

“You can often get generous termination payouts, but this is individual.”

Usually in cases of high paid executives, individuals would have taken out life insurance policies to protect against death and incapacitation – and companies can contribute to paying the premiums for these, Jewell says.

But while multimillion-dollar payouts for standard terminations hit the headlines, Jewell says readers must also keep in mind the bargaining power of the individuals involved.

“A notice period generally tries, from an employee’s perspective, to work out how long until they’re going to get another job,” he says.

“One thing for the public to note is that when you’re at that level, the individual has a much greater negotiating power than us mere mortals.”

While Magellan’s “crazy or death” clause has not been received well by shareholders and has since been withdrawn, it’s worth remembering that the formation of contracts can often be about how much influence the employee has.

“It’s a matter of negotiating, and negotiating power,” says Jewell.

Peta Tumpey, a partner in TressCox’s industrial relations, workplace and safety team, agrees that an individual “crazy or death” clause is one of a kind.

“It’s an extraordinary clause, but I would like to think the drafting of it would have had to be quite tight,” she told SmartCompany.

“There’s much more common and efficient ways of dealing with such an event.”

There are stipulations on when shareholders have to sign off on chief executive remuneration, such as when there’s an intention to pay out more than a year’s base salary, says Tumpey. The response from the investor community on this issue shows that shareholders do take an interest in payments.

“There’s a few checks and balances there,” says Tumpey.

SmartCompany contacted Magellan Financial Group but did not receive a response prior to deadline.