Time and again, we see CEOs and similar executives make horrible decisions that massively damage a company both financially and in terms of reputation and the perpetrator is forced to resign, yet receives so much money as a going away present you’d think they’re being rewarded for their fuck up. Why??
Because the people that set compensation is the board of directors, and they are composed of other executives. They want to set the precedent for themselves.
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Also, they are all generally good friends, and want to make sure they keep the wealth “where it belongs”
Essentially, there aren’t a lot of candidates for roles like “CEO” at really large companies, so they want to attract the best candidate from a limited pool. Those people get to ask for whatever crazy thing they want if the board really wants them, and golden parachutes aren’t illegal, so why not?
Oh, there are plenty of candidates, just not ones they will consider. They only take rich people from the right background.
Moral hazard, you say
There is another aspect, sometimes a CEO is brought on in a knowingly temporary situation. Sometimes a company needs to make an “unpopular” decision, like massive layoffs or restructuring. Or they just need a CEO to come in and stir the pot. They’ll bring the CEO in, they’ll do their thing, and then once the deed is done, they will “decide it’s best to part ways” in some form.
This sort of CEO position usually is a one and done for that person making them a less desirable candidate for employment in the future, so they get a nice golden parachute to compensate. Basically, they get paid to be the “bad guy” and are essentially selling themselves as a scapegoat for the company.
Good example for anyone interested is what happened with Ellen Pao while she was CEO at Reddit.
I mean she was married to a sleaze bag
How do I apply for these scapegoat positions?
Are you saying that these CEOs have it in their contracts that they get a ridiculous amount of money if they fuck up enough to get fired? Doesn’t that incentivize them to be reckless?
No candidate for those jobs ever believes he will fuck up, nor that disastrous results are their direct responsibility. They always believe that the only reasons they’d be fired are political infighting or an investor/BoD revolt. Therefore, they want golden parachute clauses to protect them from such completely unjustified threats and criticism.
They’re usually just separation clauses - i.e. whenever Joe Blow leaves his CEO position, he gets $X million. Like a lump-sum pension, which is more money that they don’t have to call salary.
Are they short on the stock as well?
To make them go away before doing more damage although their contract is still valid for some years. Same with a messie as tenant, you essentially bribe them to go before they damage the flat even more.
Not only that, but that parachute comes with… well… strings attached. (Sorry.)
Most CEOs have a high-level understanding of a companies long-term strategic plan, which would be very valuable to competitors. That payout is probably tied to an iron-clad NDA and non-compete clause. While non-compete clauses get a lot of bad press when peons are forced to sign them, for executives they make total sense, especially when directly tied to a payout, which can be clawed back if there is chicanery.
If an executive is bad enough, paying them to not work anywhere for a few years may be less risky than firing themand risking them blabbing to th3 competition.
That actually makes sense
Not always, but often, making unpopular changes is precisely what the executive is being paid to do. Their job is to implement these changes, make sure that they are the one everyone gets upset with, and then take that anger with them when they leave.
Because they want CEOs to be willing to take risks to grow the company. Risks are risky, and thus a CEO who wants to keep making money from working there will be unwilling to take risks that might get them fired if they fail. Thus they ensure that the CEO will make money even if the risk fails so they will be willing to try things rather than trying nothing serious and stagnating growth.
Now, problem is, ceo tenure doesn’t tend to last very long these days, even when they do succeed, and CEOs usually get bonuses based on how well the company does under them.
Combine that with the golden parachute, it is in their interests to constantly make hail marries on explosive growth, because if they get fired for the fuck up they make as much money as if they stayed the full time they’ve got a contract for, which is probably as long as they would have stayed as at they will make more money sighting a new contract with another bigger company now that they have more experience, and if it succeeds they make bank on bonuses.
This is ignoring the long term consequences of incentivizing short term thinking and aggressive risk taking, but that’s not what management consultants care about.
Everybody in the thread so far has a pretty bitter take, and I agree that golden parachutes are a joke. But I want to offer a more neutral explanation:
Basically, for an executive at a near-CEO level, taking on a position at a new company involves a lot of risk. Companies want to hire a top executive who’s willing to take a career risk without having to consider their own bottom line. A golden parachute removes personal risk.
Now, it might seem like this runs contrary to the company’s own interests, but they exist to attract CEOs and other top executives. They’re meant to make an offer more attractive, and any offer that doesn’t include it will be less competitive.
Another similar question: why has executive pay skyrocketed when it’s exactly opposing to (most) companies best interests? Also, you could merely hire a qualified candidate from within the company who is already familiar with how things work and pay them still six figures, but not millions or billions. It seems kind of insane that one person is “worth” that much to a board.
The reason a business might not hire a CEO from within is because the CEO needs to represent the interests of the board/shareholders, not necessarily the employees or customers. An existing employee will probably have existing loyalties/disloyalties to different parts/people in the business and not be able to represent the board/shareholders in the way that they want.
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Usually because it was the result of part of the contract when they took the job. “Golden parachute if we ever fire you” is a reward for joining the company, it isn’t decided when they are fired.
U.S. law allows the board of directors the control of payroll. They view themselves as superior to the servants tasked with actually accomplishing the business at hand. Imagine having to work for a living when there is golf to play, yachts to sail, and mansions to be bought. These executives set themselves up for success even in failure.
In many cases those positions are terminal i.e. you fuck up company X and you are either never working again, or it will take you years to find a comparable position. The golden parachute is there to lower the risk for candidates when you offer the job. Is it abused? Of course it is, essentially becoming risk pay for people who aren’t taking any risks. Compare to the “poison pill” where any attempted takeover or removal of executives triggers a massive payout to them.
Marissa Mayer at Yahoo was a good example of this; she was a young rockstar VP at Google and could have easily held out for the top job at a bigger / healthier company (or even Google itself), but she took Yahoo’s money, failed spectacularly, and got paid $239M for, essentially, giving up her chance to ever be CEO of a big tech company again.
They’re a way to disincentivize hostile take overs. Similar to non voting shares and “poison pill” clauses
Because executive compensation is less about incentives and more about siphoning company resources off to family members of the oligarchy.
Kurt Vonnegut: “America is the wealthiest nation on Earth, but its people are mainly poor, and poor Americans are urged to hate themselves.” The converse is also true in that Americans are trained to worship the rich, and to think they deserve all the help they can get, up to, and including, socialism for the wealthy, and rugged capitalism for the rest of us. This is reflected in corporate philosophy.
It’s bad in the U.S., but it’s far worse in China. There is some crazy corruption and greed.
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Decorum of the rich and wealthy. You wouldn’t understand, peasant. /s
