Failed CEOs Should Take Their Lumps
When top executives make a mess of their companies -- and share prices -- they should be embarrassed to accept lavish severance packages.
By Knight Kiplinger, Editor in Chief
From Kiplinger's Personal Finance magazine, June 2008
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What can be done about lavish severance packages for chief executives who made a mess of their companies and were forced out after share prices tumbled and blameless employees lost their jobs?
It has regrettably become common in recent years for executive severance to be negotiated during the hiring process, when a corporate board of directors is trying to recruit a star chief executive officer. The severance agreement becomes part of a contractual commitment that is often unrelated to the circumstances of the executive's eventual firing. It's legally difficult for the board to void the contract. On occasion, though, shareholder suits have resulted in a reduced severance package.
To complicate matters, severance is often structured as deferred compensation for an executive's earlier successes, before things fell apart. Discredited CEOs always argue that they were not overpaid at termination, considering the rise in share price they achieved for stockholders during the good times.
My solution? Companies shouldn't make severance commitments when hiring executives that might later haunt them, especially if the CEO is terminated for cause. Executive-compensation consultants (who, by the way, played a big role in pushing up CEO pay) warn that this would make it difficult for boards to hire top talent. Nonetheless, I think it's a reform that is long overdue.
An ethical CEO should be embarrassed about receiving a lavish severance package after his or her errors of judgment caused severe distress for shareholders and especially for employees. (Then again, CEOs are not usually noted for their humility.)
To do the right thing -- and also to defuse public condem-nation and head off shareholder suits -- terminated CEOs and other top executives should voluntarily decline a large portion of their severance. Or, even better, they could offer to give most of their undeserved windfall to rank-and-file employees who lost jobs as a result of their mismanagement.
Reader Comments (10)
Posted by: Cathy N at 05/12/2008 08:27:33 AM
"Executive-compensation consultants (who, by the way, played a big role in pushing up CEO pay) warn that this would make it difficult for boards to hire top talent" Well, if all boards adopted this policy, these high paid CEOs would Have to accept it, wouldn't they? Or find a different line of work and let new blood in.
Posted by: Tim at 05/12/2008 08:39:41 AM
If boards think that not making severance commitments would make it difficult to hire top talent, then they are...simply lazy. The glaring problem with their mentality is that top talent will sign up if they can't get a job because the common practice is not to make the commitments. The boards are further from reality when you see that the current system of severance commitments does NOT ensure top talent given all the apparently untalented CEOs who have lost shareholders and companies money. The status quo is that you can volunteer to give up your severance if you want, but how many ...would do that? ZERO.
Posted by: Daniel Bowling at 05/12/2008 09:27:52 AM
The problem with this thinking, which is quite common in the press, is that a severance agreement is executed along with the discharge of an executive under contestable conditions. It is a way of removing an executive without having to defend the actions of the board in the legal system. Money spent on severances, however distasteful,is a cost of doing business in today's litigious society. Dan Bowling Senior Fellow Duke Law School
Posted by: Lee Nidetz at 05/12/2008 11:31:04 AM
Knight, I completely agree with you on this issue. It is generally the stockholders and employees that lose while these Corporate Gangsters take off with the money. Executive Compensation should be based on how well the stockholders and the employees do at their firms. No C-Level Executive should ever make money, let alone millions, while the stockholders lose their investments and employees lose their jobs.
Posted by: Kathy at 05/12/2008 01:12:43 PM
"An ethical CEO should be embarrassed about receiving a lavish severance package after his or her errors of judgment caused severe distress for shareholders and especially for employees." Can we get a big AMEN here??!!??...
Posted by: VT1991 at 05/12/2008 03:11:08 PM
Yes, executives should be ashamed of themselves for accepting obscene amounts of money for their failure, but they never will, because their big egos would never allow them to accept that it was their fault. Almost all of these executives got to their positions because of their big egos and the business culture accepts it and may in fact expect it of them. I do think that both business and sports, especially in the USA, has the tendency to be star-struck and think that such stars would save the company or sports team. We need to get over that...There also needs to be very strong regulation of the board members and the compensation committee. Many of them are in quid pro quo situations in the various boards and do not do the right thing for the shareholders and the company.
Posted by: Greg at 05/12/2008 07:02:21 PM
...CEOs who have caused untold damage to companies, employees, and shareholders should be forced, by Federal Law, to relinquish their salaries, bonuses, and severance. If their actions were obviously motivated by a short term self-interest payday...they should be imprisoned...This kind of systemic corruption that reaches directly to a CEOs wallet will only end when the CEOs are held financially and personally accountable.
Posted by: JD at 05/12/2008 07:43:36 PM
...(M)uch of what is reported as "severance"...is just forcibly cashing out old stock options. In short, back pay from years ago is being called severance. I don't think any reasonable people believe that an employer should be able to take back pay from years ago when they fire you....Much is made of Stan O'Neal's compensation from Merrill Lynch, but no one points out that Merrill made as much in profit in 2006 as it lost in 2007, and it made profit in his previous years too. Overall, they benefited from his tenure, if profit is any measure.
Posted by: Van D at 05/12/2008 09:27:22 PM
When an employee fails to do his or her job properly, he normally is terminated, the same should apply to CEO's.They were hired to do the job,if they fail, it's outa here buddy,no bunuses,golden parachutes. NADA!!
Posted by: djf at 06/03/2009 02:09:03 PM
From this point forward there shouldn't be any more golden parachutes, golden coffins, or other payouts for terminated CEO's. CEO's like the rank-and-file employees should have an emergency fund of 6-9 months salary to tide them over until they find their next job. And if the candidate interviewing for the CEO position has problems with this, then companies should go to the next candidate interviewing for the position. I think a positive side effect from doing this is the infusion of new blood and new ideas with the promotion of talented people from the next lower tier. I don't have an issue with a cap being placed on CEO packages. In fact I think that is good fiscal policy. If a CEO cannot live on a salary between $1M to $10M, then they need to manage their money more wisely, and I would question if the individual can manage a budget.