Integrity Matters
November 21, 2007
Fired execs could share golden parachutes
Question: (E-318)
With the recent high-profile departures of CEOs in the banking industry, I wonder what is appropriate for exit packages for these powerful managers. Extravagant exit packages are reason enough not to trust large corporate leadership. Right?
Response:
Not necessarily! Throwing good money at failed managers is wasteful. However, attracting talented leaders is expensive and creates a complicated situation in which two operational themes are intertwined: unintended consequences alongside negotiated outcomes.
First, from the negotiated outcomes, the CEOs who are departing are doing so, often abruptly - and at their board's request. They have been fired for taking the very risks that made their shareholders a lot of money over a number of years. And with risk, comes risk. Taking risks works most of the time, or some of the time, but not always. Risk-taking managers negotiate an exit package, even before they start. When these power players get fired - for cause, for underperformance, they are entitled to what they have already negotiated. And boards go along so that the "exiting" executive will leave quietly.
Secondly, unintended consequence emerges because investors, and now boards, demand CEOs perform at an above-average level, all the time, on all metrics. They have few if any opportunities to recover from mistakes, or more correctly, from the probability that not all risk-oriented investments will consistently work out positively.
The average CEO lasts fewer than five years under this perfect storm. The unintended consequence from the unrelenting demands of above average performance, always, is that these "hired guns" must take enormous risks and their golden-parachute contracts are the ugly, and costly, result.
So, how might this "extravagant exit package" mess be made better? Self-serving, handsomely compensated, management stars who lose their positions are missing incredible opportunities to take the high ground by donating part of their exit package to worthy causes. Since most of these "celebrity executives" are already rich, they can behave caringly by passing along on millions of dollars that would routinely be paid in taxes, to help legitimate nonprofits, coming across as responsible and generous citizens. Obviously, these talented managers negotiated their settlements and are legally entitled to them. However, giving something back would be excellent public relations, probably prudent tax planning - alongside residual goodwill that would reflect positively on the individual and the organization that initiated the exit process.
