More than 90 percent of respondents to this week’s RBJ Daily Report Snap Poll say big severance packages for dismissed CEOs are not justified.
John Koelmel, ousted as First Niagara Financial Group Inc. president and CEO, will receive a $5.45 million severance package, the company reported recently in a U.S. Securities and Exchange Commission filing.
Koelmel is not alone. Even with stricter Securities and Exchange Commission disclosure rules adopted in recent years, a number of dismissed top executives—including Mark Hurd and Leo Apotheker at Hewlett-Packard Co. and Carol Bartz at Yahoo! Inc.—have received big exit packages.
Several years ago, the SEC began requiring companies to disclose the values of the contracts in regulatory filings. Three-quarters of poll respondents say stricter disclosure rules have not affected CEO severance packages. Seventeen percent say the rules have had a positive impact, compared with 7 percent who see a negative impact.
Critics describe these packages as “pay for failure” resulting from lax corporate governance or cronyism.
But others disagree. For example, professors at the Kellogg School of Management at Northwestern University have argued that such agreements typically are negotiated prior to employment to recruit the most capable executives and to promote CEO actions—such as strategic risk-taking—that are in the best interest of the firm.
Roughly 700 readers participated in this week’s poll, which was conducted April 1 and 2.
In general, are big severance packages for ousted CEOs justified?
What impact have stricter SEC disclosure rules had on CEO severance packages?
Neutral or no impact: 76%
Not only are the severance packages unjustified, the whole salary structure is unjustified. The top and middle management of the big U.S. companies in all fields have been grossly unjustified and the boards of directors are the same. I thought we may have learned from our last meltdown, but there has been no change in the company management and Wall Street greed. A lot more positive things can be done if we revisit the whole compensation structure and bring them down to a more realistic situation. There are many examples of abuses in this topic, but the classic is Antonio Perez and his team from Eastman Kodak. Now that’s grossly unjustified.
The big severance packages are built upon greed. CEOs who know that they can leave with big buyouts (regardless of their lack of successes) couldn’t care less about failure. If you or I failed at our job, we’d be unemployed. Period.
—Rich Calabrese Jr.
Executives should not be rewarded for incompetence. There is no incentive for the executive to perform if he/she is going to be rewarded for success or failure. The board of directors’ responsibility is to the shareholders—not the officers they hire.
Crony capitalism spawns the “pay-for-failure” clauses in executive contracts. Is it the way of business? Yes. Is it good for business? No. Is it good public relations? No. But golden termination clauses in executive contracts will persist despite SEC rules and/or public outcry.
—Wayne Donner, Rush
This question is illogical. You give no basis for making this value judgment. Most CEO compensation packages are negotiated at the time of hiring. When a CEO is hired, the company thinks they are hiring a superstar who will make millions (or billions) in profits for the company, over many years. The company may be competing for services with another company. So the new CEO is in a strong bargaining position. She (or he) may want some bonus money as protection against getting fired, to minimize personal risk. If the CEO flops and gets fired, the whole package was probably a bad deal for the company. The reporting of large severance packages often is worded to make it look like the board of evil directors are paying off their evil CEO buddy. Sometimes this happens, but usually it’s about the bad deal made when the CEO is hired. If the CEO turns out to be a superstar, you never hear about the severance package. Kind of like the contracts the professional sports teams negotiate with free agent players. If Fitzpatrick had been the next Tom Brady, Buddy Nix would be called a genius.
—Dennis Ditch, Delta Square Inc.
I question why a board of directors would fire a CEO whose decisions and actions they all approved, time after time. This is the board that approved Koelmel’s last raise. Let’s hope they think twice about future actions (as in bank acquisitions) and incorporate a claw-back provision for the new CEO.
—Irene Burke, Burke Group
Without these packages, it would be really hard to lure giant egos to come in and make a debacle of a company. We all know that motivation is best provided when there exists no possible negative outcomes for the individual making the decisions. And one other thing, pigs fly.
If the board of directors of a private business decide to offer a big severance package, then it is just fine with me. It’s no different than a sports team paying what seems like outrageous salaries to star players. Big talent equals big money. And guess what, a large percentage of those dollars go right into the government treasury as taxes anyway. That in turn helps pay for all of the double-dipping government pensioners, 47 million folks on food stamps, the president, vice president and first lady’s monthly vacations, etc., that we would otherwise be paying higher taxes for.
—George Thomas, Ogden
The buddy system managed by a corporate board protects CEOs and other senior executives. It is very difficult for the SEC, etc. to impact this culture.
—Mike Bleeg, Strategic Results
Ask anyone who has been fired or downsized how much they were paid? Answered, limited to one or two weeks’ pay for each year worked at the company. Why are CEOs not held to the same standards? Why can a CEO work at some place for five years, be fired and be paid another five years’ pay? CEOs are paid well to make good moves, why should the paid when thing turn to bad?
—Harold Ley, Stoney Point Business Consultants
While I don't have a problem with people in positions of responsibility making a good buck, it is ridiculous that some of these CEOs walk away with millions of dollars, while running companies into bankruptcy and laying off thousands of employees. I agree that in many cases, running leaner, with fewer employees, is the way to stay in business, and many companies do have redundant workers, but there is such a thing as corporate responsibility. I believe that if a company (and its CEO) have earned a nice living in its local community, it does have some (moral) responsibility to give back to that community. Regardless of what some pundits say, not everyone has the ability or means to become a huge success and, let's face it, most of these successful companies (and their overpaid CEOs) would not be where they are without the lesser-paid employee. So, how about a bit less for the CEO and a bit more for the regular worker? Or, at least, give something back to the lesser fortunate? It's not socialism folks; it's being a good human being.
—Bruce Zaretsky, Zaretsky and Associates Inc.
That we're even questioning this practice is ludicrous —we should never give more money to anyone who has not done an excellent job. There are many employees hurting because of these people. And business keeps getting less and less effective. MBA programs, please take note: I believe we have very few—if any—people worth these large sums of money. Please start teaching students effective management. And, instead of giving the excuse that these payments were agreed on beforehand, why not push to have this practice stopped.
—C. Funt, freelance writer
Bonuses negotiated for recruiting purposes should still have clauses that allow for adjustments based on the success or failure of the executive and the circumstances causing the termination.
They should get one week's pay for every year of service with the organization, provided the same calculation is used for the employees on the floor, on the dock or in the office. If no package is offered to non-executives, then no negotiated settlement should be made to executives.
—Jerry McCabe, Irondequoit
I am sick of the corporate greed that runs rampant in this country. Only in America can you get a big fat check for running a company into the ground while the rank-and-file of that organization struggles to feed their kids and pay their mortgages. If these so-called executives are so great that they command such high salaries and incentives, then how come they fail? It is just plain ridiculous, and it has to stop.
—M. Curtain, Rochester
If publically traded companies comply with various government regulations, they can negotiate whatever compensation package they want to with a CEO. If the stockholders don't like it; sell, invest in another asset, and move on. This is the United States of America, which still stands for free choice. However, under the current state and federal administrations free choice in America is being eroded.
—John Rynne, president, Rynne, Murphy & Associates Inc.
Their salaries aren't justified, so why should their severance package be?
Hell no! They should only receive a severance package if they truly made a positive impact on both the firm's fortunes and the communities’ fortunes.
I think that the contracts entered into by any company when hiring a CEO should be honored. I think that a company that proposes to provide a "buyout" package to a failed CEO is just plain stupid. So while my opinion is that all contracts should be adhered to, I think the contracts should be written in a way that absolutely does not "pay for failure". Actually, in my capitalistic mind, it should be the opposite. There should be opportunity for additional bonuses or compensation by achieving targets or milestones put forth in a hiring contract. There should also be termination clauses in place for incompetence or failure. Imagine where Kodak might be today.
Capitalism is based upon a risk vs. reward system—the higher the risk, the higher the potential reward should be. The problem with many corporate CEO compensation packages is that the personal reward is very high, and the personal risk is very low. These packages encourage CEOs to gamble and when they lose the bet, it is the shareholders who pay, not the CEOs who receive big severance packages.
—Tom Hess, Application Specialists Inc.
A severance package for a top executive when they do a bad job is a disgrace. Any company with that type of policy needs to replace their board and any executive that follows that line of thinking. Where is the shareholder value with that idea? Recently a top executive at Excellus was given a $10+ million severance package after 31 years for what just doing his job not to mention being given every top perk know to man; what a scam. What does the real working employee (the one who does the real work and makes the real profit for the company) get after 31 years? A party cake, a little gift and a smile and a handshake from the top executive; what a bad joke. We know private companies can do what they want and they do but the severance excess is totally out of hand. If you own stock in a company that has a top executive severance policy it's time to sell that stock and buy into companies that actually care about all their employees and their stock holders.
—Ken Pamatat, Creative Images Photography
CEOs get well paid while at their job. Generally, they are not worth their salaries and bonuses, since they rarely have a significant effect on the company products and profits. Exit bonuses are unnecessary, since there is no possibility that by their departure they will contribute to the future success of the company. If they failed in their job, a go-away bonus is even less justified. As any other employee, they should use their income during their employment to provide for their retirement. Their retirement benefits should be no more than for the average employee. Would the “severance package” have been more useful invested for retaining employees and improving the company?
—Ingo H. Leubner, Crystallization Consulting
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