October 4, 2011--Pay For Failure
Imagine the following--
You've applied for a job at Hewlett-Packard and, good news, it's offered to you. Next comes the discussion about your compensation--how much you'll be paid and your benefits package. The money sounds good as do the health care plan and the company's contributions to your 401(k).
But then you ask what the deal will be if you're let go. Even in a circumstance "without cause."
"What do you mean?" the human resources staffer asks. If the company has such a policy--and most don't--she'll say, "If after five years here you are let go we do have a modest severance package. You'll get one week's pay for every year of employment. But, if we have to terminate you before five years, unfortunately there is no severance."
If you find a way to mumble how unfair this seems to you--why, for example, severance doesn't kick in until after five years, the HR person might appropriately say, "This is the way capitalism works. If you and the company do well, you'll be rewarded; if it or you don't do well, there is a price to pay."
If she were being honest, she might add, "This is especially true if you do not do well. As a private company we do not reward failure."
If she were being fully honest, she would add, "That is, unless you're the CEO. Then these rules do not apply."
And in fact this policy in regard to CEOs was exposed a few days ago when Hewlett-Packard fired its CEO, Léo Apotheker, after he had been on the job only 11 months.
He was deemed by everyone on the H-P board to have been an utter failure, and yet he walked away with at least $23 million in termination benefits. (See linked New York Times article.)
In his case he was very generously rewarded for failure.
The deal that guaranteed his payoff was struck before he spent one day on the job.
He knew in advance that no matter how he or the company fared during his tenure--no matter how brief--he would receive a cash payment for the equivalent of two year's base pay (that would net him $2.4 million); a bonus of another $2.4 million (this was what it was anticipated he would receive if he survived for at least a year but which he was paid even though he was asked to resign a month short of that); and of course there were all sorts of H-P stock goodies loaded on (including future stock bonuses that he will receive after, as anticipated, the company does better under the leadership of his successor CEO, Meg Whitman).
When confronted about why H-P and most other Fortune 500 companies routinely put so much on the table before a person proves himself, corporate compensation experts claim that it is necessary to make these kinds of up-front deals because otherwise it would be impossible to recruit these high-flying corporate types.
They offer a baseball analogy--you have to be willing to ante up tens of millions for an Alex Rodriquez because if the Yankees don't the Red Sox will scoop him up.
I know A-Rod and, with all due respects, Mr. Apotheker is no A-Rod. Rodriquez has hit more than 600 home runs whereas Apotheker was fired from his last job as co-CEO at SAP after just six months. He was, in effect, unemployed and I am sure would have jumped at the H-P job without any guaranteed money.
Minimally his wife would have signed a performance-based contract just to get him out of the house.
Speaking of performance-based, isn't that what capitalism is supposed to be about? No pay for failure? That if you have something at risk--venture capital or money invested in the company's stock--when things go well you get the big bucks; but when they don't you lose your stake? That's what I learned from my reading of Adam Smith.
So I am confused.
In classic Free Market philosophy entitlement programs for average folks are called into question--if you can't make it on your own, too bad. Let your family or your community or your church take care of you.
Isn't this what we're hearing from Republicans these days?
But if you're the CEO of a Hewlett-Packard, with nothing at risk--in fact, just the opposite--not to worry. Their corporate entitlement program will make sure everything is taken care of.
But about this we are hearing not a peep from the likes of Mitt Romney, John Boehner, Eric Cantor, or Paul Ryan.
You've applied for a job at Hewlett-Packard and, good news, it's offered to you. Next comes the discussion about your compensation--how much you'll be paid and your benefits package. The money sounds good as do the health care plan and the company's contributions to your 401(k).
But then you ask what the deal will be if you're let go. Even in a circumstance "without cause."
"What do you mean?" the human resources staffer asks. If the company has such a policy--and most don't--she'll say, "If after five years here you are let go we do have a modest severance package. You'll get one week's pay for every year of employment. But, if we have to terminate you before five years, unfortunately there is no severance."
If you find a way to mumble how unfair this seems to you--why, for example, severance doesn't kick in until after five years, the HR person might appropriately say, "This is the way capitalism works. If you and the company do well, you'll be rewarded; if it or you don't do well, there is a price to pay."
If she were being honest, she might add, "This is especially true if you do not do well. As a private company we do not reward failure."
If she were being fully honest, she would add, "That is, unless you're the CEO. Then these rules do not apply."
And in fact this policy in regard to CEOs was exposed a few days ago when Hewlett-Packard fired its CEO, Léo Apotheker, after he had been on the job only 11 months.
He was deemed by everyone on the H-P board to have been an utter failure, and yet he walked away with at least $23 million in termination benefits. (See linked New York Times article.)
In his case he was very generously rewarded for failure.
The deal that guaranteed his payoff was struck before he spent one day on the job.
He knew in advance that no matter how he or the company fared during his tenure--no matter how brief--he would receive a cash payment for the equivalent of two year's base pay (that would net him $2.4 million); a bonus of another $2.4 million (this was what it was anticipated he would receive if he survived for at least a year but which he was paid even though he was asked to resign a month short of that); and of course there were all sorts of H-P stock goodies loaded on (including future stock bonuses that he will receive after, as anticipated, the company does better under the leadership of his successor CEO, Meg Whitman).
When confronted about why H-P and most other Fortune 500 companies routinely put so much on the table before a person proves himself, corporate compensation experts claim that it is necessary to make these kinds of up-front deals because otherwise it would be impossible to recruit these high-flying corporate types.
They offer a baseball analogy--you have to be willing to ante up tens of millions for an Alex Rodriquez because if the Yankees don't the Red Sox will scoop him up.
I know A-Rod and, with all due respects, Mr. Apotheker is no A-Rod. Rodriquez has hit more than 600 home runs whereas Apotheker was fired from his last job as co-CEO at SAP after just six months. He was, in effect, unemployed and I am sure would have jumped at the H-P job without any guaranteed money.
Minimally his wife would have signed a performance-based contract just to get him out of the house.
Speaking of performance-based, isn't that what capitalism is supposed to be about? No pay for failure? That if you have something at risk--venture capital or money invested in the company's stock--when things go well you get the big bucks; but when they don't you lose your stake? That's what I learned from my reading of Adam Smith.
So I am confused.
In classic Free Market philosophy entitlement programs for average folks are called into question--if you can't make it on your own, too bad. Let your family or your community or your church take care of you.
Isn't this what we're hearing from Republicans these days?
But if you're the CEO of a Hewlett-Packard, with nothing at risk--in fact, just the opposite--not to worry. Their corporate entitlement program will make sure everything is taken care of.
But about this we are hearing not a peep from the likes of Mitt Romney, John Boehner, Eric Cantor, or Paul Ryan.
posted by Steven Zwerling at
5:03 AM
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