Should CEOs be rewarded for failure?
It is commonplace for CEOs of large American corporations to receive huge paychecks, even when the companies they are entrusted to lead are losing market share, cash and share value. If a company does well, how well should the CEO be rewarded? When the company deteriorates, should the CEO be given a substantial increase in pay? Should the CEO be fired -with an eight -figure severance package? Some numbers to think about, in 1965 the average CEO made 24 times the salary of the average employee. In 2005 the average CEO made 262 times the average employee. What do you think is the Ethical solution to this problem?
This post was prepared by Charles Logan. He will be the leader of this post. This topic blogging was started on 8th Tuesday and will be end on midnight of 14th Monday.
Sure a contract is a binding agreement but one has to wonder why it was made in the first place. Do we have an obligation to these professionals to pad their pockets despite their performance? I say no. It’s time that professionals start acting like professionals and earn their money just like we do.
Some might say that we can not recruit the needed personel with out bonouses but I find that hard to believe. There is an abundance of displaced professionals in the US. Now is the time to change our thinking and tie bonuses with productivity. If the CEO is making millions is there really any need for a bonus? I believe I could endure without it for the sake of the company. The workers are the ones who should be getting bonuses based on their productivity and they are not. I believe we should share the wealth between those that earn it. It is time to break the status quo and make some hard decissions about the future of this companies economic foundation. Look at the politicians with their big benifits plans after just one term in office is this not setting the wrong example for industry? As President Obama says it is time to “change” our out of date thinking and lean up for our own economic salvation.
I think in all fairness, all employees should be rewarded according to the company’s success. Executives should not be given a greater retirement package or greater bonuses than the rank and file employees. It really boils down to taking care of your friends as opposed to good business practice.
This is a big issue nowadays. In my opinion, this would have to vary by each individual situation. A company’s failure is not always completely the CEO’s fault, as the success isn’t either. When a company is doing bad, an assessment has be made on why it is doing bad. If a decision made my the CEO has a direct correlation on the failure, then the CEO should NOT be rewarded at all. I also think the vice versa is right. 8 figures may seem like a lot, but if that CEO is running a multi billion dollar company and doing good for it, then the reward is just a small percentage of it. I understand that this assessment can’t be made all the time and can be tough to trace it down to the root of the problem. In that case, I believe it is because of poor management, so the CEO should NOT be rewarded. One of the latest examples on that is AIG. They payed HUGE bonuses to their board and a big check to their CEO, yet the company is considered one of the five thrash companies right now. A lot of their employees gave a big portion of it back, but we as investors don’t exactly know what happen and who got how much. From the CEO’s point of view, he/she should accept a reward if deserved, or else not accept it. From our point of view, it is highly unethical to pay the CEO that much when millions of investors are suffering losses from the company. My bottom line point is that, we all should make money or none of us should in terms of investing in a company. The difference is how much we make. Starting from the CEO all the way down to someone who has one share of that company, the reward will decrease.
I do not understand why we should be paying CEOs for failure. This should seem a no brainer. Failure certainly shouldn’t be rewarded. Bonuses are earned for generating growth. I do understand the higher the risk the higher the return way, but I don’t agree to pay CEOs millions for losses. No one else gets paid when they quit, why CEOs should get paid millions. Why they need severance package when they actually failed at doing their job.
I completely agree with your comment regarding it being a no brainer! Why do we keep paying millions of dollars in bonuses to CEOs if they’re company is failing? I’ve never really understood the logic behind paying someone for poor performance?..or paying them to leave?…or the conscience (or lack of one) for accepting payment?…especially, when you consider the amount of people losing their jobs. I would really enjoy it if a CEO would pass over a bonus or reduce their salary for a while and see how many jobs could be saved..10, 20, 100!?
Fahed you and I are on the same page. It seems that no one agrees with these rewards for failures but the CEO’s. It makes no sense whatsoever to reward a CEO for failing miserably at his/her job. I think that instead of giving CEO’s millions million dollar severance packages, the funds should be equally distributed to those less fortunate hourly workers. While I do think that everyone involved in the success of a company should be rewarded, I do think it should be more carefully distributed. With the bulk of the rewards going to the employees working in the “trenches”. They are usually underpaid and overworked.
Yea I agree Fahed. Wonder when this started, rewarding a CEO for failure. It just doesn’t make sense to me. It is like a slap in the face to the share holders. They are losing money while the CEO is racking in tons of money.
I have never, nor do I have any knowledge of contracts that these CEO’s and their lawyers draft…but if they are as smart and critical to the success and failure of a company, I am sure their contracts are written up in similar fashions as sports athletes. It might include guaranteed bonuses for working at the company for so long, a lifetime percentage salary severence(includes getting fired or retirement), incentives, benefits, stock options, etc…The contracts have to be attractive to keep these key players from becoming free agents. Some may not sign “non-compete” clauses. We will probably not know the inner workings of these failed CEO’s contracts and reasons behind the amounts of money until they write their own memoir…to make more money.
Good point, I suppose alot of these huge payments that just seem ridiculous could be a result of the negotiations that took place for the CEO’s contract. However, just like athletes, that contract should have certain clauses that cover the company in the event of wrong-doing by the individual, and vice versa. You would think running the company into the ground would be an obvious situation for a clause that somehow protected the company, but I guess it is hard to prove that the CEO himself was the one responsible for the failure in that situation.
It is pretty nuts to think that these CEO’s are receiving huge paychecks, however most of these companies are paying them competitively. When you look at the NFL, NBA, and MLB contracts they are going up as well. That may not be an apples to apples comparison but most of the incomes in the U.S. are going up. Also many of these CEO’s knows company secrets concerning marketing strategies, engineering techniques or financial investments. These people are valuable to the company and if they fail there secrets or processes can be compromised. Also the reason that the salaries of these individuals are going up is because of the free market. If company A is doing well and company B wants company A’s CEO then company B is going to pay more for company A’s CEO. This is going to raise the price of the CEO’s job over time.
The part of this question concerns me is that when the company deteriorates, should the CEO be given a substantial pay increase? My answer would be NO; however it is up to the board members to make that type of decision. Hopefully if the company deteriorates the CEO would be fired and a new one would be hired. If the company wants to hire a good and reputable CEO should they go out and buy the best CEO out there even if it raises the CEO position pay. Or should they settle on a lower paid CEO that has little experience to get them out of financial trouble. I would think they would want to higher the person that is the most qualified to get the company out of trouble.
I do not think the CEO should get an eight-figured severance package. This is a slap in the face to the employees that are still working for the company. The board members ultimately decide how much they should reward or punish the CEO.
Great point about the knowledge that a CEO has. Lots of times, the severance package is just “hush money” so that the CEO doesn’t take his knowledge and secrets from one company to another. At the same time, I agree with everyone else that the magnitude of some of the hush money packages is insane; it could hurt the company more to release that much capital than it does to release a secret or two.
CEOs should be rewarded reflecting how good or bad the company does. If things are good then give them a bonus, if things are bad then no bonus. I see CEOs as captains of a ship and everyone knows that the captain is the last one off the ship when it goes down, given this, no substantial increases in pay when a company deteriorates.
If CEOs get fired and then take home an eight-figure check then so should I, I helped too. We all know if I get fired I will receive nothing and so should the CEO, we are all equal. The ethical thing to do is treat them as equals and if things are well then pay them and if times are hard they should feel the crunch as well.
The best thing I thought of when a CEO receives an 8 figure severence package and a non-compete clause, is that it may have been the only way the board of directors could keep him/her from running to a different company and trading company secrets. In that example, I can understand giving him/her that kind of money, because it is a drop in the bucket overall.
I agree that it is ludicrous that the companies are letting the CEO take home a eight figured package when they have done nothing but drove the company in to the ground.
I wonder if the companies that give their CEO’s severance packages are obligated to do so because of a written contract. That is all we hear about in the news is the CEO’s getting large settlement packages. If this was guaranteed money to the CEO when he left then he should be entitled to the money. All companies need to learn from there mistakes and not include the large severance packages in the contracts when they hire their next CEO.
I agree with you in that case John. If CEO’s are given a written contract when they start, that says they will be given a large sum of money when they leave, it’s not their fault, it’s the companies. I was reading about one crooked CEO today, http://www.startribune.com/business/57565652.html. He was allegedly deceiving his shareholders. I know there are many good CEO’s but the news only reports on the bad ones.