Why are Golden Parachutes a thing?
Why are Golden Parachutes a thing?
Time and again, we see CEOs and similar executives make horrible decisions that massively damage a company both financially and in terms of reputation and the perpetrator is forced to resign, yet receives so much money as a going away present you'd think they're being rewarded for their fuck up. Why??
Because the people that set compensation is the board of directors, and they are composed of other executives. They want to set the precedent for themselves.
Also, they are all generally good friends, and want to make sure they keep the wealth "where it belongs"
To make them go away before doing more damage although their contract is still valid for some years. Same with a messie as tenant, you essentially bribe them to go before they damage the flat even more.
They're a way to disincentivize hostile take overs. Similar to non voting shares and "poison pill" clauses
Another similar question: why has executive pay skyrocketed when it's exactly opposing to (most) companies best interests? Also, you could merely hire a qualified candidate from within the company who is already familiar with how things work and pay them still six figures, but not millions or billions. It seems kind of insane that one person is "worth" that much to a board.
Usually because it was the result of part of the contract when they took the job. "Golden parachute if we ever fire you" is a reward for joining the company, it isn't decided when they are fired.
Decorum of the rich and wealthy. You wouldn't understand, peasant. /s
Essentially, there aren't a lot of candidates for roles like "CEO" at really large companies, so they want to attract the best candidate from a limited pool. Those people get to ask for whatever crazy thing they want if the board really wants them, and golden parachutes aren't illegal, so why not?
There is another aspect, sometimes a CEO is brought on in a knowingly temporary situation. Sometimes a company needs to make an "unpopular" decision, like massive layoffs or restructuring. Or they just need a CEO to come in and stir the pot. They'll bring the CEO in, they'll do their thing, and then once the deed is done, they will "decide it's best to part ways" in some form.
This sort of CEO position usually is a one and done for that person making them a less desirable candidate for employment in the future, so they get a nice golden parachute to compensate. Basically, they get paid to be the "bad guy" and are essentially selling themselves as a scapegoat for the company.
Moral hazard, you say
Are you saying that these CEOs have it in their contracts that they get a ridiculous amount of money if they fuck up enough to get fired? Doesn't that incentivize them to be reckless?
No candidate for those jobs ever believes he will fuck up, nor that disastrous results are their direct responsibility. They always believe that the only reasons they'd be fired are political infighting or an investor/BoD revolt. Therefore, they want golden parachute clauses to protect them from such completely unjustified threats and criticism.
They're usually just separation clauses - i.e. whenever Joe Blow leaves his CEO position, he gets $X million. Like a lump-sum pension, which is more money that they don't have to call salary.
Because there are also CEOs and similar executives that do NOT fuck up and make billions for their companies. Big risk, but big reward.
Some would argue the workers make the companies all their money...
OK, if it's so easy and the workers create all the value, those workers are free to start their own competing company and become the billionaires.