SUBSCRIBE to get new articles in your inbox.
The Question: What two things do Marissa Mayer, Travis Kalanick, and Andy Rubin have in common?
The Answer: Paid to Fail
- All three executives were fired for failing to perform their corporate duties. Rubin (Google) was found guilty of sexual harassment, and Mayer (Yahoo!) of managerial ineptness. Kalanick (Uber) was dismissed for a combination of both.
- All three banked tens of millions in severance pay.
The “golden parachute” was originally meant to align managers’ incentives with shareholders’ interests in the event of a merger or acquisition. Even if they lost their jobs without cause in the deal they’d be remunerated. The clause has since evolved into its more controversial form, the “golden handshake”, where a company pays a problematic employee, dismissed with cause, to leave quietly.
In this environment, the best move for many CEOs may be to crash and burn. Here’s a recipe for getting wealthy from the work of others:
- Become an executive at a high-profile firm.
- Do something rash, sexist, racist, or generally fail at your job.
- Collect a massive severance package in exchange for going peacefully.
- Relax and let your shares vest as others work to repair your mess.
Mayer was paid $23 million and Rubin walked away from Google with $90 million, after already receiving $150 million while the allegations were being investigated.
These may seem like outliers, but golden parachutes are common.
Source: Nat Berman, https://moneyinc.com/largest-golden-parachutes-ever/
These payouts are nothing compared by windfall Travis Kalanick received from public investors after selling $1.4 billion in stock following the IPO. This is almost as much as the top 5 names in the chart above combined.
Paul Graham compares starting a company to jumping off a cliff and building an airplane on the way down. Kalanick jumped off the cliff and dragged $20 billion of VC money with him, but then was handed an airplane by the board and buyers of Uber stock. While most Uber employees face a lockup period that prevents them from selling shares until November 2019, Kalanick was free to sell on the day of the IPO. Uber lost over $1 billion last quarter, but that’s not his problem. Kalanick can leave the difficult work of creating a profitable business, fighting lawsuits from drivers and taxi lobbyists, and competing with Lyft to his successor, Dara Khosrowshahi.
Whether you receive cash in a golden parachute, or freedom like Kalanick, getting fired as a top executive seems like a blessing, not a punishment.
Attempts at Regulation
Congress has tried several times to combat excessive CEO compensation. The Deficit Reduction Act of 1984 tried to limit severance to 3 times annual salary. This was intended to be the upper bound. Instead the number became the new normal. This was coupled with an increase in other forms of compensation, like lifetime parking benefits at airports for former American Airlines CEO Jeff Smisek. Firms also skirted the rule by “grossing up” golden parachutes to cover taxes on the original payment.
The 2010 Dodd-Frank Act also attempted to curb CEO pay, by requiring shareholders to vote on compensation. This has been shown to have had little effect, and parachute payments actually increased following the law.
Why have golden parachutes at all?
Defenders of golden parachutes highlight two main arguments: hiring and acquisitions. They argue severance can be used to attract top talent, luring candidates with a large payment the firm may never actually make. Like flood insurance, the parachute is something nice to have that you hope to never use.
Golden parachutes also make it more difficult for the company to be bought out, as the acquirer must pay severance to any fired executives at the smaller firm. As shown below, golden parachutes quickly took off in the 1980s, when junk bonds made it possible for large firms to be taken over by corporate raiders.
There are two problems with the “acquisition defense” argument. First, it’s often in shareholders’ best interest for a company to be acquired, as shares typically rise 15-25% on news of a takeover. The argument also directly conflicts with the golden parachute’s original purpose: to ensure that management will allow the firm to be bought if necessary.
The Better Question: How can companies stay competitive and maintain loyalty without a golden parachute?
Regarding the hiring incentive, there are better ways to attract workers than rewarding poor performance with severance pay. Stock grants for long term achievement ensure that management benefits when the company does. In an extreme example, Elon Musk’s new pay package awards $2.6 billion in stock, but pays him no salary at all. Instead, he gets one twelfth of his shares if Tesla’s market cap hits $100 billion, and then another twelfth for every increase of $50 billion in the company’s value. Market cap isn’t a perfect metric for performance, but it’s a better system than short-term milestones or a golden parachute.
Another option is to mimic Switzerland’s Minder Initiative, which abolished severance packages completely. This may be the best path.
For now, if you’re a CEO in most parts of the world, it still pays to fail.
If you liked this post, subscribe to get new articles in your inbox.