Lucrative Consulting Fees Reach Bigger Set

When Samuel J. Palmisano retires next month, he'll enjoy a generous goodbye present: The former International Business Machines Corp. chief will earn $20,000 for any day he spends four hours advising his longtime employer.

That means hypothetically he could pocket $400,000 a year for 20 half-days of work -- twice what his predecessor, Louis V. Gerstner Jr., makes per day under a similar consulting arrangement. Mr. Palmisano's contract is open-ended and doesn't specify the number of days he will work. Mr. Gerstner's 10-year consulting contract expires in March.

Many former executives enjoy lucrative consulting gigs at their old companies. Boards dole out these agreements to guarantee smooth leadership transitions and prevent former bosses from joining a rival, poaching staffers or filing suit against the company.

Companies have paid key former executives as consultants since at least the 1970s, and the practice gained acceptance because boards wanted continued access to those ex-officials' knowledge, according to several executive-pay attorneys.

In some cases, the deals are so generous that they go beyond the grave -- such as the consulting accord for Phillip "Rick" Powell, who stepped down as CEO of First Cash Financial Services Inc. in 2005.

Under Mr. Powell's consulting contract, the operator of pawn shops and check-cashing stores was required to pay $3.5 million in consulting fees if Mr. Powell had died during 2011, the company's latest proxy said. (The 62-year-old Mr. Powell, who has been fighting U.S. charges of illegal insider trading since last year, remains alive and well.)

The controversial perquisite bothers some activist investors, especially because these deals are sometimes made when a company is nudging an executive out the door.

"Consulting agreements often are a hidden substitute for severance pay," says Brandon Rees, head of the AFL-CIO's Office of Investment. "Their questionable value will influence how shareholders vote on executive pay in the 2013 proxy season."

Consulting arrangements have fallen in popularity among CEOs over the past decade, but are gaining traction for other departing C-suite leaders, according to analyses for The Wall Street Journal.

In the five years ended Aug. 1, 16 former leaders of the nation's 1,000 biggest concerns took home at least $500,000 in consulting fees, concludes Equilar Inc., a pay-research firm. That compares with 28 retired chiefs making that much between 1996 and 2001, a previous WSJ study found.

Yet "there's a general upward trend" since 2007 in the number of consulting contracts for other senior executives, such as finance chiefs or general counsel, reports Theo Francis, an independent compensation researcher. He reviewed nearly 300 such agreements for the Journal.

Just a tiny fraction require a minimum workload -- 7 of 174 recently disclosed executive consulting agreements, according to a separate study by Mr. Francis. (Mr. Francis is a former Journal reporter who left the paper in 2008.)

Kimberly-Clark Corp. guarantees Jan B.C. Spencer $50,000 per quarter through mid-2014 for consulting services -- and a maximum of 200 hours a year, according to a regulatory filing. The senior vice president retired in June at age 57 after more than three decades with the company, and says he chose to limit his hours because he didn't want an "onerous" obligation.

He estimates he spent nearly 50 hours counseling former colleagues this summer, such as helping a European team with planning.

Smooth transitions are a big part of the plan. Advice from a predecessor proved useful during James D. Wehr's initial months as chief executive of insurer Phoenix Cos.

Dona D. Young, his predecessor, received $300,000 for six months of consulting after she retired in 2009.

"Dona helped me transition into my new role and expand my relationships inside and outside the company," Mr. Wehr recalled. Thomas Johnson, Phoenix's board chairman, said Mrs. Young was especially useful in the initial months, and coached Mr. Wehr about promoting a rising star whom she had been grooming while CEO. Mrs. Young declined to comment.

It doesn't always work out, though. In early 2008, Acxiom Corp. promised to pay departing Chief Executive Charles Morgan $500,000 annually for up to three years of consulting. Mr. Morgan agreed to help his successor, John Meyer, strengthen the company's customer ties and advise on technology strategy, according to his consulting accord. But less than two months later, management stopped using Mr. Morgan's services. An Acxiom spokeswoman declines to say why. Per his accord, Mr. Morgan still collected $1.5 million. He didn't return calls seeking comment.

At Boeing Co., Scott Carson retired in January 2010 after running its commercial airplanes unit. He earned about $1.5 million for advising Boeing no more than 75 hours a month. The two-year contract expired last March.

Mr. Carson's replacement, Jim Albaugh, "had relatively limited experience with our commercial customers," and so the former executive "provided continuity," a company spokesman says.

Mr. Carson says he attended aircraft-delivery events and accompanied colleagues to complete sales, including one in Ethiopia. But he never consulted the maximum amount per month, the retired executive says. And "in the last six months, it was nothing" -- even though he received his full fee.

The transition "ended up being a bit shorter than we estimated," the Boeing spokesman explains.

Mr. Carson now chairs the board of regents for Washington State University, among other things.

A CBS Corp. finance chief who won a post-retirement consulting gig took an unusual approach after he no longer felt needed. Fredric G. Reynolds was due $100,000 a month for three months after leaving the media concern in August 2009, followed by $60,000 a month through August 2010.

Mr. Reynolds says he assisted his longtime employer with U.K. outdoor billboard deals, among other things. By early 2010, however, he stopped being busy for CBS, he recalls. "I couldn't justify doing this [consulting] through August," he says.

CBS accepted Mr. Reynolds's request, halting payments in late February, a spokesman says.

Former executives rarely cut short their consulting gigs, however.

Mr. Reynolds says boards should be more skeptical of such arrangements. "It's a way to get people to move on," he notes. "But it doesn't wind up being very productive."

On the other hand, some companies swear by their prior leader's ongoing advice. First Cash's Mr. Powell has advised it since he stepped down as CEO seven years ago. He initially got a $500,000 annual fee. Since April 2010, he has earned $700,000 a year under an arrangement that directors extended from 2014 through 2016.

First Cash continues to perform well partly thanks to his strategic involvement in areas such as management, acquisitions and store expansion, says CEO Rick Wessel.