How Badly Must a C.E.O. Behave Before Pay Is Clawed Back?
nytimes.com
nytimes.com
As I was being paid peanuts, and the project was worth millions, I knew I couldn't take any chances with that. I looked into insurance, but it would have cost over half the pay that was already peanuts.
The problem wasn't that I was worried I'd slip up, or that I'd do something unethical. My worry was that the company would do something unethical and blame it on me somehow.
If I were applying for a CEO position and saw a clause like this, I'd refuse to sign that contract, too. So United isn't wrong... There are definitely people who would refuse to work for them if they put that clause in the contract.
>If I were applying for a CEO position and saw a clause like this, I'd refuse to sign that contract, too. So United isn't wrong...
I might be reading it incorrectly, but I think there is a very big difference between capped and uncapped liability/penalty clauses. What you seem to be describing facing sounds like the latter, and yes that should give absolutely anyone, anywhere, in any situation, the screaming hibbie-jibbies. I think looking for that sort of clause, which can be subtle, is probably one of the more important things when going over any contract. As long as liability is limited the rest can be planned out, but of course nobody can sanely deal with infinities. On a larger level that's the fundamental point behind limited liability corporations, the bankruptcy code, hard learned principles regarding the non-inheritability of debt, and so forth.
But I don't think that's the same thing as a pay clawback, which is fundamentally capped. "You break the law, you face a maximum (with us) penalty of your salary for those years" doesn't seem unreasonable at all at c-level. They're not being asked to take retroactive responsibility for something amorphous like "failure", nor is the sum unbounded or affecting their personal net worth before taking the job, or even for that matter touching any money they made using their holding of that salary before the clawback like interest/investments. It feels like a reasonable deal: don't commit and (company related at least) felonies while on the job, if you do then your contract of employment was voided at that time and the company wants its money back. Again looking to corporate liability limitations, they don't apply if someone purposefully pierces the corporate veil for example. It's not supposed to be a shield against serious breaking of the law.
I can see how some clawback terms could go way too far, with trigger clauses being too fuzzy, penalties not bearing reasonable relation to the violation, or both, but I'm not sure the concept itself is theoretically bankrupt.
Personally, I would absolutely refuse to sign such an agreement.
You can't force people to accept your contract. If all the good CEOs look at your contract and run away.... well now you are stuck with only bad CEOs who were desperate enough to agree to your contract. That is the market speaking.
If you have ever taken a job, you have signed an agreement that limits payments of performance bonuses and severance packages in the case of gross misconduct.
I suspect the employment agreements for the executives in this case included such clauses. The board failed to enforce them at an expense of millions of dollars. The investors are right to sue.
Also, I'm pretty sure excluding negligence a company can only fire you if you do something bad or an accident happens by law.
CEO is a position anyone can equally be successful or terrible at. So why do we insist putting the absolute most importance into it?
>anyone
Anyone, really?
It's easy to shit on what you have no experience in.
They don't have to recoup all of the company's losses, but docking a serious chunk of salary is cases of behaviour that is outright unethical or malicious (rather than simply an honest mistake), should be totally acceptable.
So United thinks that the threat of "punishment" (or really, not getting a huge payout) because of breaking the law would make them an unattractive company to people at the senior management level.
Barring the morality of it, is this statement true for anyone who qualifies as senior management? Would this deter you from taking a job at United?
If this statement is true, we likely need to do a major overhaul of the type of people we allow into senior management. If it's not true, I'm thinking this is another harmful practice brought about by the incestuous nature of board members and senior management across companies. Which is again, something else that needs a major overhaul.
Secondly, a CEO, being the head of the company, could technically be held 'accountable' for hundreds of millions of dollars, and it'd be reasonable for someone to want to shield themselves from such a liability, which might not necessarily arise out of a violation of their own, but rather of the company.
If you dumped all the executives, the raise amounts to $30/paycheck. Do you think $600/year is the difference between good employees and those that let men get beaten?
Morningstar's free summary doesn't break down cash vs. equity. The latter is mainly being paid by shareholders and wouldn't represent cash that was available to distribute to employees. Therefore it is highly likely that the "windfall" of a regular Joe CEO would be much less than I have noted here.
They are also subject to invasive and strict ethics and disclosure rules revolving door policies.
CEOs mint money because of social connections, not value to the business. The board members who implicitly endorse graft should themselves be subject to criminal sanction.
Sure, the CEOs are themselves often on the boards of other corporations. The incestuous nature of this top level is bordering on the absurd.
Customers and investors are fickle, and often irrational. Supporting a CEO that is driving both away because "presumption of innocence" might be the worst possible move you could make, depending on the situation. In fact, I'd argue that a hallmark characteristic of a good CEO is someone who can say, "My continued presence is hurting the company. I need to step down, so everyone else can succeed" if that's what's needed.
Yes, even if the controversy is completely made-up bullshit.
In the long run, the company and the (former) CEO will both be better off if they can look back at a gracefully handled departure, where everything turned out to be so much noise, than some Pyrrhic victory, where you've alienated customers, investors have walked, but, by god! you stood by your CEO!
The upside of following courts and presumption of innocence is, you can tell your next CEO, "This won't happen to you because you'll respect the law, and what's more, if you respect the law we'll even respect the presumption of innocence and keep you in your job much longer than at Mozilla's and GitHub's. And you'll be clean of controversy when you leave, so it will be much easier for you to jump on an even bigger CEO position."
You should contact some behavioral economists and offer your services. I'm sure they could use someone that knows exactly how people are going respond to complex behavioral questions with multiple competing incentives. They could save a bundle on the speccing and running of experiments.
But I'm not a senior executive.
That kind of mentality is more likely to attract execs looking for a cushy high paying job with little to risk.
The prevalence of clawback provisions among Fortune 100 companies increased from lower than 3% prior to 2005 to 82% in 2010.
If everybody (or nearly everybody) starts doing so, then the competitive disadvantage of having such clauses is reduced, since it may still be better to have risky CEO job in F100 company than not having one.
Has United recruited top talent up to this point?
I'd think top talent would, you know, behave ethically, and not, for example create a special mostly empty flight that's convenient for a politician just to get a hanger in Newark approved.
On the contrary. CEO's are much more often psychopaths than average. It's in fact the sharks that bubble up to the top.
I'm betting you can't back that up with a significant study that provides actual proof of that common claim. I've seen this statement made routinely for two decades online and have never once seen it supported with anything concrete.
CEOs in the referenced study were 20x more likely to be psychopaths than non-CEOs. That's the same rate as for prisoners.
I find that hard to believe. References for this claim are readily available.
That's more likely a projection of how'd you'd behave in that situation that it is a reality.
He also seems to have tanked customer satisfaction ratings. He was CEO of UAL from the beginning of the continental united merger in October 2010 to September 8, 2015. Here's a relevant article. https://www.nytimes.com/2015/09/15/business/despite-shake-up...
Just because more CEOs are psychopaths doesn't mean that psychopaths are better at doing the work of CEOs.
Frankly many CEOs seem to favor short term gains that benefit themselves and their stock option grants over improving quality and long term growth. I don't know that this guy is a psychopath, but I'm not interested in flying United if I can help it.
We'll never be able to weed out "bad people, so the best solution would be for the government to take a stronger stance and corporate law breaking and to dole out much bigger fines.
However, then we have the same problem with many CEO's/senior management in a revolving door with government/lobbying. So we've got another buddy-buddy system that ensures the .1%+ almost never have to be held accountable for their poor actions.
How does that increase profit?
Even then - 50 years ago it was commonplace to use cross-subsidization to fund routes like this - the ICC would do it - "Okay, so you want to offer a route from Newark to Los Angeles? Sure, we'll grant it, but you have to offer service between Los Angeles and Tuscon, Santa Fe and Flagstaff as well."
Now admittedly, this doesn't pass the smell test - because the demanded service was probably not in the public interest - but this kind of thinking was used in the transportation industry for quite some time.
To reframe that principle in this context, it's not enough to punish people who ask for bribes. You need to punish people who answer those asks, rather than reporting them.
If you're a CEO of a public company and cannot sniff that out, you're screwed.
The example you gave is not at all analogous. The FAA or its predecessor was regulating airlines in the public interest. Towards that objective, they allocated routes with high and low profitability.
I'd say that taint is worth more than the hanger.
And frankly, the guy wasn't some unwitting stooge. He could of picked up the phone, spoke to the governor of NJ or NY and made it go away. It requires a moderate act of courage and integrity.
He wasn't paid $30M to leave. He was forced to step down and paid what he was owed due to his contract, he was getting that $30M regardless.
The man who extorted him was a potentially valuable political ally for the Governor of NJ, calling the governor to complain might have caused United even more problems. Calling the Governor of NY about a New Jersey problem would have been even more damn ineffectual.
And lastly, the fact you think a CEO can just call governors to "work out" problems being extorted by politicians is one of the most naive things I've yet read on this site. You are basically saying he should have offered campaign donations to get Chris Christie or Andrew Cuomo in order to get them to crack down on one of the heads of their Ports Authority. Because otherwise they don't pick up the phone, so essentially you think he should have paid a second bribe to get out of paying the first.
American exceptionalism at its finest, where the more exceptional you are, the more your behavior is excepted. If you really screw up, you may have to be put under house arrest.
The only thing we will not except is stealing from the rich and powerful. Madoff learned that the hard way.
As such, the larger the company and the more capital it's responsible for, the MORE necessary it becomes to the company to find the most evil, biggest most psychopathic criminal to guide it, given that profit is the only measurable feature and the only thing that concerns the company in any way.
It's just the system. This is what you get, and betting against it is like betting against the tide. They do in fact have to be competitive about hiring bigger criminals because failing to do so can be fatal to the company, when it's set against other companies with no such compunctions.
I only made it a year under a micromanaged, 'everything is urgent' environment. It all stemmed from the CEO. He was in every meeting, including dev initiatives. Not only did he have no significant technical knowledge -- he also lacked in areas where I would expect most CEOs to excel: market strategy, branding, and finance management.
My exit was a large blow to the company, as a lot of co-workers saw me as the unicorn who would 'fight the good fights' for everyone else. And, I did -- until my health started to decline from the stress.
The story ends with me perusing LinkedIn one day, after five+ former co-workers had left, with him stepping down as CEO. He would have never made this decision on his own (pride, control), so I know that external investors definitely dictated this.
So, I would say pay gets clawed back when CEO's consistently make poor business decisions and over promise/ under deliver to investors in order to obtain more funding.
Accountability is for the little people.
Its the same mechanism that holds together corruption networks, basically everyone has the gun trained on everyone - a giant Ponzi scheme, where every new member can expect money, and the originators have to come up with ever greater sum to silence the mexican standoff.
Of course, that doesn't make the shareholders whole.
As for the "hard to recruit and retain top talent" argument ... that's the oldest and most miserable excuse in the book for tolerating bad execs.