Issue of the week: Golden handshakes for tarnished CEOs

last updated 8 January 2015

Failure, it seems, is its own reward, said Liz Moyer in Forbes.com. Two recently departed CEOs, Stanley O’Neal of Merrill Lynch and Charles Prince of Citigroup, have collected huge pay packages—after their companies posted huge losses. O’Neal, who retired in October after Merrill wrote off $7.9 billion in mortgagerelated debt, walked away with $159 million, including $30 million in retirement benefits and $129 million in stock and options. Prince resigned last week after Citi announced that it would write off up to $11 billion in bad mortgage debt. He’ll collect $29.5 million in pension, stock, and option awards, as well as a $12 million “performance bonus.” But Prince might yet top O’Neal’s haul. Prince holds options that are worthless at Citigroup’s current depressed stock price. But “a new chief executive could come in and clean up the place and send the stock price soaring,” giving Prince a rich, if delayed, payday. What an outrage, said Allan Sloan in Fortune. Both Prince and O’Neal were paid lavishly in 2006, “in large part based on the profits that Citi and Merrill reported” that year. Now, “Citi and Merrill are in effect saying that some of the profits they recorded in earlier years” were illusory. In all fairness, Citi and Merrill should ask their former chief executives “to assume some responsibility, share the sacrifice, and give back some of what they earned.” Dream on, said lawyer and shareholder advocate William Lerach in The Washington Post. I recently pleaded guilty to making illegal payments to recruit plaintiffs in my cases, and I will soon start serving a one-year term. So you would think that “the American principles of responsibility, accountability, and justice require everyone, even corporate titans, to pay a price when they mess up.” But that’s not how corporations now operate. Sure, O’Neal and Prince “lost more than $20 billion in company money,” yet they’re leaving in grand style because their boards are worried about their own hides. “Executive failure is consistently rewarded with giant payments—or really, payoffs—to keep the parting sacrificial lamb quiet so he or she won’t bleat to the shareholders, lawyers, and the media that the others at the top of the company (and in the boardroom) knew what was going on.” It’s a conspiracy of silence. While it’s easy to bash Prince and O’Neal, the problem really is systemic, said James Surowiecki in The New Yorker. The corporate compensation system is now largely built around stock options. Options “seem like the ideal tool for insuring that a CEO cares as much about the company’s stock price as his shareholders do.” And indeed, options give CEOs a big incentive to avoid complacency and take risks, because the executives stand to earn a huge sum if the risk pays off. But options are a one-way bet: CEOs typically lose no more from a risk gone disastrously wrong than they do from a risk gone slightly wrong. As a result, according to a recent academic study, executives who are paid largely in stock options tend to “swing for the fences,” usually with bad results. In short, “in trying to reward reasonable risks, we’ve rewarded unreasonable ones as well.” That worked out fine for Prince and O’Neal. For their shareholders, not so much.