Golden parachutes reward risk or moral hazard?

The July 31st Economist wrote an article called The wages of failure and brought an interesting perspective to those CEOs dismissed because or PR disasters.  Do golden parachutes reward bad leadership or reward risk crucial for a firm to rebuild, re-imagine, and compete within capitalism?

The article acknowledges the outrage many have to folks like Tony Hawyard, former CEO of BP who famously uttered, “I’d like my life back”, when pestered about BP’s response to the Gulf of Mexico oil leak.

The Economist brings up that the golden parachute payout is not a reward for leadership incompetence, but a payout for past services, in Mr. Hayward’s case, 28 years of successful work at BP.

The blood lust to condemn and punish CEOs, like Mr. Hayward, for receiving millions in compensation leaves out crucial blame for the board of directors who, themselves, are embarrassed about removing CEOs.  Who approves these compensation packages?  The boards.  And it is these CEOs who are the peers of these boards members, themselves, made up of current or former bosses.  Why would they take down a peer?

The Economist makes a second case for large money being handed to these dud executives as these company boards don’t look at the money as their’s so they tend to be generous in their handout.  Again, why short-change a peer?

Here is a look at some particularly juicy handouts.

The real debate, for me, is the defense of these golden parachutes by the Economist, best illustrated with the following words:

More importantly, ruining bad bosses is a bad idea.  Who would want to take a job that came with a serious risk of financial destruction?  Whoever did take it would surely manage in a way that minimised the risk of catastrophic failure.  That sounds peachy until you remember that capitalism depends on risk-taking.   Penalise failure too harshly and “you risk creating bureauracrats,” says Ira Kay of Pay Governance, an executive-pay consultancy.

I do not consider the payouts to Mr. Hayward or former HP CEO Mark Hurd as protecting capitalism’s inherent risk.  I see golden parachutes to these types as cronyism by the very boards that are intended to act in the firm’s best interest:  to maximize shareholder value.  In Mr. Hayward’s case risky public relations behavior.  In Mr. Hurd’s case, risky ethical behavior.  In neither risky business behavior.

Because boards are so cozy, failed bosses are rarely fired, they are usually allowed to either resign, retire, or get “reassigned”, as Mr. Hayward has been, to Siberia…

No matter the solutions bandied about, in England the Cadbury and Hampel codes for public companies, clawback clauses, or America’s recent financial-reform act, there remains a dogged conflict:  business ethics can never compete against moral hazard.