Sears to pay $25.3M in bonuses to top execs after filing for bankruptcy
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It appears that the bonuses are contingent on the company hitting financial goals. This is a normal practice of a company in bankruptcy trying to retain talent during a wind-down or rebuild.
That way the core executive team would be motivated to bring in the extra $200 million _without_ requiring huge bonus payouts for failure.
It's a bit shocking that most other answers seem to accept and justify this status-quo without a flinch.
People complain all the time about not being compensated relative to their value to the company, but when people are compensated relative to their value, people still complain. There's no win.
You're acting like running a large business isn't a skilled position. It very much is.
A janitor at a hospital cannot become head surgeon by continuing to work as a janitor, and while a janitor is critically important to the hospital, the supply of janitors is such that the pay will never compare to that of the head of the surgical staff.
The typical path to surgeon might look something like this:
High school -> Pre-med -> Med school -> etc. -> surgeon
The path from janitor to surgeon might look like this:
High school -> Married -> Janitor -> Family -> Quit job to go back to school -> bankruptcy, divorce -> janitor
To return to the topic at hand, it's entirely fair for top executives (or surgeons, etc.) to be paid their value, but only if it's also possible for others to try to achieve the same value. Path dependence breaks fairness.
Those two things are completely unrelated.
And why the fixation on janitors? I never said janitors should be paid like executives, only that the paths to higher paying positions need to be more widely available.
Everyone is entitled to some things, but no one is entitled to everything.
The main limit to executive entry is having access to an executive vacancy. The short version is that if you are an honest hard working employee that access will never be available to you.
So, perverse as it seems, existing talent with explicitly-performance-linked compensation is often the least worst choice during a wind-down.
It's bankruptcy. It's a failing company. It's ugly. Theoretically these folks are making a lot less than they would have had the company not failed.
They cause the problem and then make others deal with the fallout. Being angry at this isn't weaponizing people's desire for fairness. It's the same as if someone had a factory generating industrial waste that they piped on to your land. They are keeping the profit, and making others pay for it
Naturally. That's normal everywhere.
The question is how can the financial goal rewardable with 10 (EDIT: 8) digits be bankruptcy?
How is it this efficient or moral? We've got the worst of both worlds here and it's because the people getting the benefits are the ones making the rules.
Why has our society organized itself
so that company executives win whether
or not they do a good job?
It suggests several reasons, including:
* Many of the conventional mechanisms put in place to prevent this do not work. For example, the observed behaviour of boards does not resemble arms-length negotiation with executives over pay. "Independent" remuneration committees and external consultants likewise do not effectively represent shareholders' interests.
* Shareholders' voting power is very diffuse. If I own one billionth of Google via an index fund in my retirement savings, I ain't exactly got much leverage over them.
* Minority shareholder lawsuits and hostile takeovers are relatively powerless in the current age.
* Outrage costs - i.e. damage to the executives' reputations and future employment prospects - can often be mitigated by camouflaging big payments [2].
* The few large institutional shareholders don't seem inclined to do much about corporate governance. Some such as CalPERS have done things effectively in the past.
[1] https://www.amazon.com/Pay-Without-Performance-Unfulfilled-C... [2] One example the book gives is a CEO whose pension terms were modified so that it the rate was based on his highest-paid year, with pay defined to include income he made from exercising stock options. A minor change that gave the executive an extra $20 million.
Same with execs. Nobody who’s any good will agree to work for a failing company unless they’re guaranteed a payoff. Why try to work on something that’s probably going to fail when there are so many growing companies out there?
BTW the same is true for other highly-sought talent like engineers. Big companies on the brink of failure will shell out if that’s what it takes. It’s not special treatment for the “rule-makers”.
How is this unfair?
The argument has always been that they are paid so much due to the risk they take, but that risk has shown to be non existent. If you were going to follow that argument then the rank and file employees would be getting the high pay since they are left with nothing due to other people's choices
Not true. For some of them, earning 10mil might be far less than they would otherwise make. It's sad that some people are so much more (monetarily) valuable than other people, and is a function of a lot of things, most of them unfair, like different life circumstances, different IQ/talent, etc. But that's no one person's fault - I may as well be upset that I'm shorter than average. I mean, I am upset - but not at anyone, just at nature or something.
Part of it, I believe, is that all these companies are interconnected with executives sitting on boards of multiple other companies. Once you are in the in group it's a bunch of people oking each other's salaries as individuals companies rise and fall.
It's a great system for that group. It's a shit system for everyone outside of it. It's also not a fact of nature so it's something we could prevent if we decided as a society to do so
If by that you mean "let's convince other people to use their money differently" (convince shareholders to pay executives differently with their own money), then I'm with you - go right ahead and try, though again, I think it's an uphill battle since shareholders already have more info than you, and care more since it's their money.
If you mean let's use the power of government to make laws that change this behaviour, then I'm strongly opposed - it's the shareholder's money to lose if they decide to spend it unwisely, I don't think the government should be any more involved than in deciding programmer compensation.
Btw, I personally think that executive compensation might well make sense in many cases - executives can change the future of a company, including causing it to exist or not exist in 10 years, in a way that just isn't true for the average employee. (As you yourself suggest when you complain of the executives causing the bankruptcy).
I'd want the law to not allow executives to get their massive payouts while at the same time they arent meeting their agreements with other employees such as in Sears case here where the employees aren't getting bonuses/severance while execs are. That's where they are privatising gains in the form of bonuses but making the losses public when society has to come in and help support the safety net for a bunch of employees who just got shafted.
Letting shareholders and execs set up a "tails I win, heads you lose" situation in every single major corporation isn't good for having the economy actually put money towards useful ideas, and degrades the rule of law that binds society together. The biggest issue wasn't just that execs are getting paid more, it's that it was decided that agreements with regular employees can be ignored but we still have to do right by the execs
I believe this situation shows a basic divide between conservative and liberal viewpoints where conservatives look at this situation and believe it's only involving the shareholders and execs making the agreement where liberals look at it and see it as agreement between two people that is affecting everyone around them and society.
We probably won't get much further discussing it if we are looking at the same event and seeing entirely different situations
One obviously wrong approach is to print money and hand it to the workers until they are all getting the same millions as the execs. This simply gets you inflation. Prices will reflect that retail clerks can now afford hundred-thousand-dollar t-shirts, and executive compensation will soar accordingly.
A more subtly broken approach is to regulate wages, so that you cannot pay an executive too much or an employee too little. Blocking the transactions that would do so destroys value. In this particular case, if Sears can't get anyone to administer a controlled descent and recovery, it will crash and burn. Then a worker's risk of layoff goes from likely to guaranteed. You could imagine something similar if we heavily penalized layoffs: less risk-taking, fewer positions available in the first place.
An economist would tell you to steepen the progressive tax curve and expand the EITC, or even run a Negative Income Tax that isn't conditional on work. This isn't free either, but it's generally regarded as the "least worse" option that achieves the social goal while minimizing perverse incentives.
The idea of a paternal responsibility from corporation to employee is intuitive and emotionally resonant, but not necessarily useful. You can say we are socializing the costs of business's risk-taking. You can also say we are purchasing flexibility as a public good, and making a profit on the value it creates in the tax base. I'd like to see us go even further into this "corporate welfare" by eliminating the employer's healthcare obligations in favor of a public option.
Either way, I would prefer UBI. If the employees had a backup plan and weren't reliant on their jobs to live, then you'd see the majority of them did out the second the employer tried to renegotiate on bonuses and severant for them like what has happened with Sears.
At that point youd start seeing the company give more money to employees instead of saying that the executives are the only one keeping the company going rather than the people doing the actual work that brings in revenue
I'd probably call it more a difference between a libertarian viewpoint than a conservative one.
And IMO, as soon as you stipulate that they are "making the losses public when society has to come in and help support the safety net for a bunch of employees who just got shafted.", then you'll probably get agreement from most libertarians that this is a lose lose situation. And I tend to agree - if the government is bailing companies out, it can definitely impose conditions on it.
It does not need to be the government handing out cash as a bailout to companies before the costs are becoming a public cost
It could be simply "fashion", or everyone making a mistake, or some kind of weird market condition that will fix itself.
I don't think anyone truly knows, just like no one knows if stocks are overpriced right now. Or if compensation for e.g. programmers is also overpriced. It's really, really hard to second-guess the market and get the right answer, and I hesitate to trust people who a) don't know much about the specifics here (not saying that's you), and/or b) don't actually have skin in the game. If the people who are choosing how much to pay executives, and putting their money where their mouth is, are choosing this - well, they could definitely be choosing wrong, but its their money to lose for the most part.
Actually median salaries have been relatively flat for the same time period (in the UK and US, at least) [0]. Where do you think the wealth created by the workers' increased productivity is going, since it's clearly not going to the workers?
I'm not sure that people "with skin in the game" are really the best people to ask, since their justifications are likely to be local (as in, "our competitor is offering $X so we must beat that") without much insight into wider economic conditions.
0 - http://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-...
There are some stories that make sense to me about where the increased productivity is going - into healthcare, into more leisure time, etc. But again, I'm not at all qualified to make any judgements here.
> I'm not sure that people "with skin in the game" are really the best people to ask, since their justifications are likely to be local (as in, "our competitor is offering $X so we must beat that") without much insight into wider economic conditions.
Well, kind of the basis for the whole idea of capitalism is that you can trust people to make local decisions that are totally selfish to them, without having to consider wider economic conditions, and that it will end up working out for everyone. The great value of capitalism, in my opinion, is that given appropriate conditions, this is usually true. It's not true in the case of some market failures, like monopolies, etc, but it's usually true.
And in this specific case, again, it's totally in the interest of the people who have money, to give less of it to executives. Sure, there are lots of reasons why it's more complicated and people don't always behave in their best interest, but are you really so sure that this is the case here? Why? Why are people choosing to fork over extra money here, and what makes you think you can improve the economy by changing that?
No need to bring up this side note if you're not going to use it as an argument or back it up then
>And in this specific case, again, it's totally in the interest of the people who have money, to give less of it to executives.
As another poster stated elsewhere in this thread, the observed behavior of boards and executives negotiating has not been of two independent parties. The executives are now not only socially connected but have a direct incentive to constantly increase pay for their friends, so that their friends return the favor. This is not using the shareholders money well, but just quid pro quo favors that fuck everyone outside of this in group[1]. Capitalism doesn't just work unregulated because parties quickly acquire power and then subvert the rules of capitalism to funnel even more power to themselves. We are directly observing executives of modern corporations doing this via their web of board seats and increasing each other's pay ad infinitum at the expense of shareholders, employees, and society
[1]https://www.wsj.com/articles/who-wins-when-ceos-sit-on-multi...
My own view is that neoliberal economic policies have led to workers having a lower share of economic output [1], resulting in an increasing share going to shareholders [2] and executives. As you say, it's totally in the interest of the people who have the money to give less of it to their workers.
You're correct that I can't absolutely "know" that to be the cause, but then I don't know what makes you so confident that there is an efficient market for executives.
[0] https://mainlymacro.blogspot.com/2014/01/understanding-ever-...
[1] https://www.bls.gov/opub/mlr/2017/article/estimating-the-us-...
[2] https://www.macrotrends.net/1324/s-p-500-earnings-history
> Well, to turn that around, what makes you sure that capitalism is working correctly here?
Well, I don't know that. I tend to assume that economics is usually true, or is at least a good approximation, because it usually is in my experience (or, more importantly, according to most economists).
Or better yet, let me make a more specific claim which I think better reflects my belief - I assume that in most markets, there are problems. No market truly approximates Econ 101 style free markets- because of sticky prices/wages, information asymmetries, human psychology being tricky, etc.
However, I think a) the differences are usually minor and self correcting over the long run, and more importantly, b) it's often hard to interfere in a way that fixes the problems without messing things up more.
In other words, yes, maybe executive compensation is not perfect and is in a bubble or some such thing - however, I hesitate to think anyone on the outside can know if that's true or not, and "fixing" it without messing things up is hard.
Moreover, I think the focus on executive compensation is mostly meaningless anyway. It's not like an executive making a few extra millions is what costs employees their salaries, not usually anyway - in most large companies, where this discussion is relevant, we're talking small amounts of extra money per employee anyway.
Really, the reason most people focus on this is because it's flashy. It makes good headlines and political punchlines to talk about executives making millions - I highly doubt most people have truly done any of the actual work necessary to understand whether they really are "overpaid" or not. (As opposed to shareholders, who I relatively trust because it's in their interest to do the work, and they have no interest in making political points, only in earning more money).
> My own view is that neoliberal economic policies have led to workers having a lower share of economic output [1], resulting in an increasing share going to shareholders [2] and executives. As you say, it's totally in the interest of the people who have the money to give less of it to their workers.
Yeah, that's obviously in their interest. Personally I think if we want to help workers, we should be doing something like UBI or welfare or similar - we shouldn't be forcing companies to make sure that some employees have enough, we should be collectively making sure everyone has enough. I don't think it's morally right, or economically efficient, to force companies to bear that burden (and only for their employees) - I think that's an old school "paternalistic" view of employer/employee relations which is no longer relevant.
It's one thing to say this is how it is because they managed to pull it off. It's another to say it's completely justifiable ethically
It's not like this was specifically planned. Our society is organized as a capitalist society, which means people decide how much and in what conditions to pay others. In this case, the shareholders, via the board, have decided to pay certain compensation. Since it's their money on the line, and they're the ones with far more detailed knowledge of what's actually going on in the company, I don't see why it's any more "moral" for an outsider to second-guess their decision. (Of course, most shareholders aren't in any sense active, but they are supposed to be well represented by the board, and can replace it if need be).
> One of the premises of giving executives high pay is that they are getting it for succeeding at running the business well,
That's sometimes true. Sometimes even a well run company goes bankrupt, e.g. a video rental company when everyone switches to streaming, in which case the management might be doing a good job by extracting as much value as possible before. (Totally theoretical, I have no idea of the details in this case.)
> but as we see time and time again they still get paid out even when they fail.
And sometimes, they get paid far less. Sometimes they get paid to not make a mess. Sometimes they get paid because their contracts, negotiated beforehand, stipulate certain payouts whether or not they succeed, apparently because that's the price of hiring these people who are presumably good.
Put another way - Michael Jordan was paid a lot of money to play basketball for some teams. They made the agreement based on his past performance. If his team had ended up not doing very well, it wouldn't have made his contract suddenly null and void - at most, future contracts would probably be at a lower price.
It’s not like 5pm rolls around and these people get to roll home and forget about things.
You’re an absolute outlier if you even want one of these positions.
(And no, I am not one of these people, I like seeing my kids in the evenings).
The not being able to see your kids in the evening is one thing, but the high paid executives also get around that too. For instance Marissa Mayer having an office in the headquarters converted into a daycare for her child. Did her employees who were also on call(and forced to stop working remotely) get the opportunity to use company property for a daycare for their children?
My point is that these arguments about why it's worth it to pay executives these super high salaries no longer hold any water, because we've seen that they've rigged the game to be effectively riskless to them.
Only getting 80% of your expected payout when you run a company into the ground _and_ remove payouts to the other employees is not a risk to justify being paid 100s of times more than an average employee. It's just another case of making the risks public and the gains private
Unemployment is structured as an insurance program, not a dole, and in theory an employer has paid in over the years enough to actuarially pay for it. Same thing with pensions.
The system does have some “normal accident” anti-fragility type stuff built in.
But yes, 1. in a catastrophic outcome the public purse will get hit for hard costs and 2. even the “insured” benefits mask lots of externalities that the corporation doesn’t bear but employees and municipalities etc do.
It's the same issue with Walmart and McDonald's paying too little to live on and teaching their employees how to sign up for benefits
https://www.theguardian.com/business/2018/aug/16/ceo-versus-...
What is needed in a restructuring - access to the right people with capital, long hours to get the deals done, offloading of dead inventory, answering to shareholders, nervous employees, continue making payroll.
It's an outlier job. There's not an average employee that has that pedigree and access to take over the job.
Nor would the average employee ever want the hours nor are they productive enough.
Either this is a tautology or citation needed here. So far the argument for this has been that they bring in the big bucks so of course they deserve high compensation. The empirical evidence so far is that they have the title so they get high compensation, and their performance has little to no affect on that compensation.
Risk is normally commensurate with reward, thus if we are observing that there is little to no difference in reward, there must be no little to no risk.
I would need to see concrete proof that an exec was worth this high pay beyond, "well what if they weren't there, maybe it would be worse!?!?" Before I believed the argument again
But Steve Easterbrook's corporate and branding directives scale across the company and produce 2billion in profit. While local employees service just the customer.
Paying someone $21 million that can decisions that result in 2 billion in profit is solid business.
Argue thats how it should be, but don't try and tell me evidence supports it when the only support is conjecture
1. Why can't the executive bonuses be tied to getting out of bankruptcy?
2. Why is it a bonus if it's expected compensation?
I see bonuses for meeting financial targets, but not for exiting bankruptcy. And they didn't publish how easy/hard hitting the financial targets would be.
1. If the bonus was tied to "getting out of bankruptcy", the easiest move for an executive would be to quit and work for a non-bankrupt company.
2. It is in addition to their regular salary in order to keep them through the bankruptcy.
This is also fucked up. In many less-well-paying jobs, fucking up and getting fired can make finding another job in the field much harder. Meanwhile, precipitating a very public bankruptcy doesn’t make you unemployable as an executive? Seems like other posters here are correct. The “risk” taken by C-level executives is actually quite low and does not justify their pay.
I do however have some observations.
1. The amount of personal runway that a c-level exec has is usually much much longer than the average sales clerk working on the floor of Sears.
2. Rewards are typically given for achievements which are aligned to company goals. The number one goal for the company is to exit bankruptcy. I don't know if the $25 million in bonuses are aligned with the company goals.
3. An executive that can get a company out of bankruptcy seems like he/she would be a better executive than one that wanted pay up front just to stick around.
The unspoken agreement is that that clawback will only be triggered when the other alternative is layoffs.
Edit to add: I am however skeptical of Sears' particular situation. I'm not sure these execs have the company's best interests in mind.
Think of it as a club of like 30,000 people in the US. 3,000 of those people are geniuses, 3,000 are idiots and trust fund kids. The rest are in the middle.
You don’t want to be the director who screwed over some good old boy.
Compare things with government where people simply don’t make that much money yet it’s not hard to fill these jobs.
The argument seems to fall apart when they are they very same people who ran the company into the ground. Tax the rich and help the poor- odds are they just got unlucky in a game that makes almost no sense.
The entire premise for paying execs high salaries is that they have demanding jobs that few people have the skills to do and the work entails risks which ordinary workers do not take. And this justifies exorbitant pay and lavish bonuses. But the reality is that most of these people have no special talents, and even when they run a company into the ground and hurt people (such as those workers who end up, often, with missing pay, fucked up pensions, and no jobs, etc.) and the businesses they are supposed to be stewarding, they still end up being awarded bonuses.
The executives get this pay because they can. Any argument about it being moral or ethical falls apart when you look at reality
Absolutely. Though my experience is that the exec is in the office too when that happens...and on a 5000, 10000 or more employee company, if the employee is being called on to do that every now and then...multipled by the amount of employees being called to do that every now and then...generally said exec is basically never sleeping (probably why they're so grumpy).
And yeah, a lot of people would take the role in a heartbeat when offered.... and cry themselves to death in the bathrooms at every opportunities until they either jump off a bridge or quit.
With that being said, a ton of people would do just fine in any of the categories I listed (skill, connection, willingness). What's rare isn't people with one of those things. It's people with all of those things. Having been part of the loop to hire execs, it's really hard. I've seen a lot of people being promoted to those roles who didn't really want it from lack of candidates.
And then there's things like board members, who usually get the spot simply because they invested in the company: you own it, you get to run it into the ground if you want to (within legal limits, of course. But that's why they get the spot over someone else).
Finally...discrimination aside (and that is certainly a problem when it comes to high positions, and it definitely needs to be fixed), being lucky isn't immoral, IMO.
In turn the board was supposed to serve the shareholders but, oops, on a BK the shareholders are screwed. So basically the creditors now own the thing.
Once you’re in that spot, though, what are you going to do? Fire all levels of management above the store level? It’s not impossible but it would create absurd levels of additional risk and delay.