Introduction
US companies should not lavish CEOs who have been fired for failure to deliver results while leaving employees to languish in poverty. Most CEOs under whose tenure companies performed poorly are fired before their contracts expire. What is surprising however is that they end up wealthier than if they saw their contracts through. They get bloated severance packages that leave them set for life. This is despite leading their companies to near collapse, severe job cuts, and falling stocks. It is very lucrative for a CEO to be fired before his term is over.
The irony of these hefty compensations is that thousands of employees lose their jobs from job acts due to a company’s poor performance got meager send-off packages. These packages are not even guaranteed and the laid-off employees have to push for them through their unions or through the legal system. What is notable however is that these severance packages are not settled on during the termination of the contract but usually when hiring the CEO. The boards of directors of the companies draw up these hiring contracts. It’s the duty of the directors to oversee the interests of the stockholders, but by letting CEOS get away with such hefty send-offs they abdicate this duty.
Main body
When drawing up these contracts, there are great expectations for the new CEO such that company directors over-commit the company. These deals are shrouded in secrecy such that the stockholders rarely get to know about them until much later. Only after the CEO fails and is fired does the board and shareholders realize the true cost of the contract. Stakeholders are now coming up in arms to protest such pay-offs and prompting the board to be more vigilant in protecting the rights of the stockholders. Such packages are inclusive of; salaries foregone, vacations not taken, stock options, and other hefty emoluments (Hickman Mike, 2006)
It is immoral for CEOs who run down their companies and are fired to draw huge severance packages while junior staffs are the show’s holders are left to feel the brunt of the failed policies. Fired CEOs are actually better off than if they actually stayed on as CEOs. One example is Robert Nardelli who was fired from Home Depot had an aggregate severance package of 210 million dollars while Pfizer had to pay its departing CEO, McKintell 200 million dollars (Sloan, Allan 2007, Hickman Mike, 2006). Their tenures as CEOs were marred by underperformance and falling returns. Over 10,000 jobs were lost to Pfizer while the stock in value in McKintell’s tenure. Nardelli too had been largely ineffective at Home Depot. These are two among other similar cases and go on to show how critical the issue is.
CEOS are less motivated to work and deliver good results in their companies. They are aware that even if they were fired they would definitely be better off than when they remain in position what with the attractive severance packages that include; Proportion of the salary foregone, stock options, and other privileges such as paid-up vacations, tickets to watch games and company aircraft. (Anderson Gordon T 2003)
The CEOs will not work to the best of their capabilities and will remain indifferent to the results. In fact, they may look forward to being fired. The CEOs may not even fight to retain their positions when calls for their being fired are made. They just tender in their resignations, those packages act as a temptation away from their true role of making stockholders’ money grow
These pay-offs are also a big contrast from the worker’s predicament. Junior workers who are the true drivers of the company slave off for the company and only get inadequate terminal benefits. They also have to follow up with these benefits. When the CEOS brings companies down, several jobs are lost in the process lives hoods broken, and dreams are shattered. The CEOs get paid off for it but the junior worker is left disoriented and in financial turmoil. It is unethical to reward the CEOs for causing so much trouble for the workers. (Langfitt, Frank, 2003)
The exorbitant package compensating fired underperforming CEOs also deeply hurt the shareholders. The CEO has a duty to make investors’ funds grow. They sacrifice the interests of the investors for personal gain. They work with the knowledge that their tenure as CEO is short and tries to fleece the company as much as possible. CEOs should not be allowed to gain from hurting shareholders. They also ruin investor confidence in that; company, industry, and market in general. (Nocera, Joe and Linda Wertheimer, 2007)
Those who feel that such hefty severance packages argue that CEOs have every right to receive their packages. These pay packages were subject to negotiation between the parties and it was binding to both parties. Failure by the company to comply would prompt the CEO to take up legal action. The company would stand to lose even more if the court forces it to comply with the contract and pay up legal fees to the plaintiff’s attorneys. The directors in the fiduciary position negotiate those contracts as the guardians of stakeholders’ interests. The directors make these generous offers to win over the CEOs to their managements when in competition with others. They commit the company in their actions to an agreement that obviously hurts the shareholders. It is only fair that the company keeps its end of the bargain as the CEO was influenced by the contract in joining the company.
Others also argue that CEOs are blamed when things go wrong in the company even if there are outside factors limiting the performance of the company. A CEO may also find the existing system in a company to be too rigid and resistant to change, which also reduces his ability to perform. When they fail to make drastic improvements on the company’s bottom line they are sacked. Faced with imminent dismissal, CEOs will want to get as much as they can in their short duration of service, so the package is huge to commensurate the risk from job insecurity.
Those who champion a high severance package also argue that such a generous package encourages CEOs to be risk-takers. They can try out innovative ways to improve the company’s bottom line knowing that failure does not spell doom for them. If the experiment works out, everybody will benefit and so he or she should not be punished for trying. Benefits accruing from such positive outcomes would include; higher capital gains for investors, greater profitability, and better remuneration for the employees. These packages also help in retaining the CEOs when they are still performing.
Those arguments however do not hold since the severance packages really expose the company, the junior staff, and the investors. These packages ensure that the CEO is safe whether he performs or not. It is a win-win situation for the CEO. He or she benefits without taking any risk in signing the contract while the company risks by taking a chance or him or her. The count system favors the CEOs in enforcing a lopsided contract.
Laws should be enacted putting a cap on these severance packages to promote a greater sense of accountability and responsibility. Thus should be done in the interest of shareholders and workers. The severance packages should be lower than the CEO would enjoy when his or her contract expires. This would enhance their desire to give results to the company. (Arran, Mick, 2007)
Conclusion
The main obligation to limit these excessive packages however lies with the directors. They draw up such contracts that clearly give the advantage to the CEO while oppressing the shareholders. This is against their entrusted role of protecting the stockholders from management excesses. They are also bulldozed by the CEOs and let them get away with even criminal actions. They also engage in bidding with other companies over a new CEO even when it’s not in the company’s interests. The board of directors’ remuneration should be pegged to the results achieved by the CEOs they hire. ( Markels, Alex, 2006). In pursuit of greater justice and equality the junior workers’ send-off packages of CEOs should be in a certain pre-determined ratio. It is the duty of the directors and the authorities to ensure that CEOs are not overcompensated.
References
Anderson, Gordon, T. Want a big payday? Get fired. If you’re a captain of industry, the day you leave may be the most profitable day of all. CNN Money, 2003. Web.
Arran, Mick. CEO Pay: Home Depot, MassMutual, and AEI. Mickarran.com, 2007. Web.
Langfitt, Frank. Pfizer’s Cut Jobs, Close Plants. NPR, Morning Edition, 2007. Web.
Markels, Alex. Shareholders Question Executive Pay at Pfizer. NPR, Morning Edition, 2006. Web.
Nocera, Joe and Linda Wertheimer. Home Depot Bids Costly Adieu to CEO. NPR, Weekend Edition Saturday, 2007. Web.
Sloan, Allan. Deals: Don’t Blame Nardelli. Washington Post, 2007. Web.