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Should CEOs Give Back When Their Companies Fail?
By JLP | October 7, 2008
Reading assignment: ‘Your company is bankrupt, you keep $480m. Is that fair?’
In that article, Henry Waxman asked Richard Fuld, CEO of now defunct Lehman Brothers, the following question:
“Your company is now bankrupt and our country is in a state of crisis,” said Waxman, a liberal from California. “You get to keep $480m. I have a very basic question: Is that fair?”
There’s that stinkin’ word again: FAIR!
Life’s not fair, Mr. Waxman. You know that.
That said, as much as I dislike Henry Waxman, he does have a point. A CEO who was in command as his company disentigrated into nothingness doesn’t deserve to keep his compensation. That’s my opinion and I’m sure it’s harsh but that’s the way I feel.
It’s no consolation to shareholders and those employees who lost their jobs and their retirement plans to hear their former CEO say, “If I had it do over again…” DUH! Who wouldn’t do things differently? We can’t do that so that’s why it’s important to make good decisions in the first place. What CEO, if they had thought this thing through, would have still made the same decision to get involved in these toxic mortgages and their related products?
We’ve discussed this subject before but I’m interested in hearing what you think of Fuld’s comments in the article. Should compensation be more rigorously tied to performance so that CEOs reap the benefits of sound decisions and consequences (real consequences) of poor decisions?
Topics: Housing Market | 25 Comments »
October 7th, 2008 at 11:35 am
JLP, why do you not like Henry Waxman? I am curious to hear (read) your view.
“Should compensation be more rigorously tied to performance so that CEOs reap the benefits of sound decisions and consequences (real consequences) of poor decisions?”
Yes. I just cannot see the value in paying CEOs so much money for failed business dealings. The joke is that any of us could have failed just as miserably for half the cost. How disheartening is it to be a low-paid worker, doing your best to keep your job, and then seeing this scum walk away with so much loot?
If they had it to do over again, they would do little more than figuring out ways to make the whole crap deal go on longer so they could get more money.
October 7th, 2008 at 11:43 am
I still can’t understand how these ousted CEOs get to walk away with millions. I recall in all my finance classes, “The goal for the CEO is to increase shareholder wealth”. In my simple mind, if you owned your own company and it went under, there wouldn’t be any money left to “take” with you. I do believe compensation should be tied to performance. Maybe they should just get what the rest of us would – two weeks pay.
October 7th, 2008 at 11:44 am
I know this will be an unpopular view but I don’t think that a contractually guaranteed payment should be revoked/clawed back when an executive fails to perform. The problem is that most executives have a very short life span at that high position and the demand for talent has propelled the market to offer such high compensation packages. If the contracts were written so that the CEO would only get paid on success, the payments would have to be SO much higher due to the risk of no payment that it would be hard to attract talent.
October 7th, 2008 at 11:56 am
I’m in the YES ITS FAIR camp. The share holders could have sold their shares if they were not confident in the CEO’s ability to increase the value of the company or if they didn’t like the “AGREED UPON” compensation package.
The rest of you are like those ppl who go into a restaurant, order a steak medium, eat half of it, and then complain to the manager that it was over cooked and you would like to have something else. Take some f-ing responsibility for your OWN actions…christ. I live in the age of mfing handouts…everywhere I look. F-YOU!
October 7th, 2008 at 12:01 pm
Bill,
Chill out. This is a discussion!
And, while I agree with you on shareholder’s being able to sell their stock, it’s tough to make decisions when you don’t know what the hell is going on the in backroom.
Oh, and FYI, I wouldn’t send a steak back.
October 7th, 2008 at 12:08 pm
1. Let firms compensate executives however they please.
2. Prosecute fraud.
This system would seem to keep ill-gotten funds out of criminal executives’ hands, yes?
October 7th, 2008 at 12:38 pm
Strictly speaking: once the bonus (or salary or incentive or… etc.) is paid out, you can’t rewind it. You can’t take it back. The compensation package (however foolish and irresponsible it was) was agreed upon.
The reason we’re even bothering to ask questions like these is because we (as a culture) have this sense of justice that demands punishment for perceived high crimes such as this. I say “perceived high crimes” because if it looks like the CEO’s irresponsible behavior has resulted in massive job losses and economic distress then clearly he was acting with only his best interests in mind.
It’s up to the boards of these companies (or whomever is ultimately approving these compensation packages) to ensure that they’re rewarding not just short-term performance but long-term stability. What looks good on paper for Q1 of ‘07 could have disastrous consequences by the time Q4 of ‘08 rolls around, right? While our sense of justice demands that we hang these guys as the perpetrators, and while it might satisfy us to take back what we see as speciously earned, that wouldn’t solve the problem. We just need to hope that those Boards of Directors out there have learned some valuable lessons and look for more integrity in the next generation of CEOs.
October 7th, 2008 at 12:46 pm
@ Adam Jones — Yes, any of us could have failed just as well at half the cost. The problem is that not many of us could have ever succeeded at any price. That’s why a good CEO/leader is worth the high pay.
@ Everyone Else — No one likes the idea that someone who made such poor choices would have been compensated so well. Still, I have to agree with Matt Ranlett and Bill (minus the explicatives). Whether we like it or not, this man (Fuld) was paid according to contractual obligations entered into by Lehman’s board of directors acting on behalf of the shareholders. You can’t go back and unilaterally change that contract just because you don’t like the outcome. Furthermore, it’s certainly not the place of any jacka$$ Congressman, especially Waxbrains, to lecture anyone over poor performance in the marketplace.
That is, there’s enough blame to go around for the mortgage mess on all sides, but it’s funny how Congress never takes any of the blame for distorting the marketplace with all its goofy rules and regulations to begin with. Congress is happy to lecture the free market about its problems and demonize those it considers responsible. However, no one in Congress ever pays the price for the government’s failures. At best they just point the finger at the other party. Why don’t we insist that Congress work for free since they’re presiding over so many failed government programs — Social Security, Medicare, public education, etc.? Congress squanders more of our money in one day than any corporation could ever possibly lose or any CEO be paid. Hypocrites!!!
October 7th, 2008 at 1:07 pm
@ F_D “It’s up to the boards of these companies to ensure that they’re rewarding not just short-term performance but long-term stability.” 3
That’s like putting cats in a room full of rats. The problem is that CEO’s are board members also. It’s like having 2 careers at the same time while padding each others wallets. I’ll be your board member if you’ll be on mine. For shareholder’s that is a conflict of interest and shouldn’t be allowed.
October 7th, 2008 at 1:41 pm
@JP:
“And, while I agree with you on shareholder’s being able to sell their stock, it’s tough to make decisions when you don’t know what the hell is going on the in backroom.”
please don’t get me started on transparency. Nevertheless, if you, the shareholder, feel left out of the “backroom discussions”, then maybe you should find another company to buy. I don’t know, just a thought.
everyone is happy when things are good. everyone is placing blame when things are bad. sad but standard.
October 7th, 2008 at 2:35 pm
This is a tough question. I generally have a great deal of faith in the markets. However, I believe that many CEOs are getting away with highway robbery because a) boards often are not very independent, and b) many if not most mutual funds don’t vote their shares. A huge portion of the stocks owned by middle class Americans are owned through funds.
What really bugs me is when CEO packages are based on performance goals, the goals are not met, and the board decides to give the CEO the compensation anyway.
I agree that contracts need to be respected. However, it’s a two way street.
RDS
http://financialvalues.blogspot.com/
October 7th, 2008 at 2:35 pm
“That’s like putting cats in a room full of rats. The problem is that CEO’s are board members also. It’s like having 2 careers at the same time while padding each others wallets. I’ll be your board member if you’ll be on mine. For shareholder’s that is a conflict of interest and shouldn’t be allowed.”
hindsight bias. if you don’t like the management, don’t own the stock…simple, no?
October 7th, 2008 at 3:14 pm
I generally agree with Matt Ranlett and others about executive pay and going back to take away what someone has earned. But I also think this is a particular case.
As a general stance: the boss – CEO – doe shave to accept responsibility for failings, especially on this scale. Having said that I do not agree with taking away what he has already earned.
The problem with Fuld is he made his astronomical figures in December of last year, 2007. The timing is off…
October 7th, 2008 at 3:55 pm
@ Bill That’s not hindsight, I didn’t just come up with that. Google it, and it’s a complaint I’ve had for years. Ahhh, but nobody listens to me.
Most of my portfolio is in mutual funds, so I, like yourself, don’t have the choice to choose stock with independent boards. That’s just silly.
October 7th, 2008 at 6:15 pm
here, here Steve Braun, you stole my thunder and rant, but I’m going to anyways. lol.
First, I think it is rather ridiculous and disingenuous for Congress to be talking about golden parachutes. If I were Fuld, I would have shot back at Waxman and said, oh Senator Wexman you mean like Congress who get a lifetime pension and free medical care for only serving one term regardless of their performance, or Congress which gets max pay increases every year even if they don’t bother voting on their pay raise and regardless what mess they make of America, this when Congress has the lowest approval ratings in history, this at a time when the Congress has tallied up $10trillion national debt, this Mr. Wexman when your State of California is in huge deficit and the Governor has already probed the Treasury for a California loan bailout, so do you think it is “fair” Senator Wexman that you members of Congress get to keep your golden parachutes? At least during my tenure Senator Wexman, Lehman had huge profits to which I was compensated. What has Congress done during your tenure Senator to better the over $10 trillion dollar national debt economy?
i truly believe people should be compensated for reaching the pinnacle of success in our country. If not, what motivation is there for anyone to be innovative, entrepreneurial, and work hard? I also believe that excess compensation should be based on performance in bonus but tied longer term to ensure the viability of a company through restricted stocks (e.g. can’t sell for 5-10 years after departure from company) and things like that. Boards and shareholders should hold executives accountable if the company tanks or doesn’t perform, too. God knows Congress doesn’t lose their golden parachutes if they mess up.
It’s election year, this is all grandstanding to divert attention away from our Government, democrat and republican, who have since 1991 created this mess (of course with our consumer behavior). CEO paychecks are easy targets, they aren’t running for election and they aren’t the ones who created regulations/deregulation, created loose fiscal and monetary policies, so of course Congress is going to blame wall street and its CEOs. If you were Congress with abysmal approval ratings and being at fault, wouldn’t you?
October 7th, 2008 at 6:30 pm
The $480M they are talking about is for the previous 8 years combined. Fuld says most of it was in the form of stock which he lost $ on along with everyone else and only $60M was in salary. I’m guessing that the last 8 years were not all total losses for Lehman as it seemed to crumble quickly.
I think if he had a contract and got paid based on the contract then that is fair.
The board of directors may be giving him excess pay or not holding him accountable for his performance. Fuld may have been negligent in running the company properly. It would be fair for the shareholders to pursue legal action in a class action suit to hold Fuld and the board personally financially accountable for the failure of Lehman.
Jim
October 7th, 2008 at 8:08 pm
10/06 — Richard Fuld, the former head of Lehman Brothers, says he will wonder “until they put me in the ground” why the US government did not rescue the 158-year-old Wall Street firm and claims regulators knew the full scale of its condition far before its collapse.
Please. He started it!
October 8th, 2008 at 3:33 am
As I told some people last week, the place to start on executive compensation is simple, as long as shareholders are forcing boards to do what the board and comp committees are supposed to do.
1. Clawbacks.
2. Highwater marks
October 8th, 2008 at 4:18 am
The verdict is still out on whether these CEO’s did anything Illegal.
Blaming the government and mortgage lenders for the current financial meltdown, is akin to blaming McDonalds or the candy aisle at Wal*Mart for making us fat. Yes they offer the product for sale, but ultimately we have the choice of whether or not to buy it.
With the exception of those families who truly faced financial hardships beyond their control (medical emergencies, jobloss, etc.), a significant number of American Families willingly positioned themselves within a paycheck or two of bankruptcy due to their own greed.
October 8th, 2008 at 7:46 am
@Ken –
“Most of my portfolio is in mutual funds, so I, like yourself, don’t have the choice to choose stock with independent boards. That’s just silly.”
no one is forcing you to invest. if you are not happy with the rules, and don’t have the power to change them, then don’t invest.
@Benjamin – right on!
October 8th, 2008 at 12:28 pm
@ Bill – That’s right no one is forcing anyone to do anything. And there lies the problem, attitudes like yours contribute to the problem.
If we don’t change the system we will continue to get the same results.
October 8th, 2008 at 12:39 pm
Put some real power into the hands of the stock holders. All compensation packages should be voted on annually. Too many Boards of Directors are rubber stamp show pieces.
October 8th, 2008 at 1:01 pm
Being mad that CEO’s make millions is like being agitated that half the Yankees hold $200 million contracts (or what ever they are). I agree that offering a failed CEO a hefty severance package is wrong — you’re essentially rewarding someone for failing. But look around you, that’s what the entire system is doing as a whole. The borrowers who have failed are being rewarded with loan modifications — Bank of America announced this week they’re offering loan-mods for 400K troubled homeowners. Now, it’s the homeowners that have done everything right who are the ones that are suffering — left without access to money.
You can’t gripe about one portion of the system and not the other.
Shifting gears a bit, I’m concerned over the stipulation in the new $700 billion plan that will cap CEO’s salaries for participating firms. Do you think that will discourage many firms from participating?
October 8th, 2008 at 9:30 pm
With great risk comes great reward. The problem is that these well-paid CEOs are getting a great reward without any risk at all, let along a great risk.
October 9th, 2008 at 5:09 pm
the irony is the idea of aligning the ceo’s incentives with the shareholder’s is part of what got us here. Stock options. How many times have I heard that stock options were the grand guarantee of aligned incentives?
Bottom line: so long as CEOs manage to the stock market we will have distortions. The stock market doesn’t value the things that truly make a great business. Or at least it does in the long run, with lots of misguided zigs and zags in the meantime.
Make CEOs actually have to purchase their stocks on their own. I think that would improve things a lot.
The general principle, though, I think is right. Until CEOs actually face risk on a personal level, they are driven by misguided short-term values. Last time I checked, most CEOs face no personal risk. Please fire me for 20 million, too.