Case Wage of Failure: the ethics of executive Compensation For the last couple of weeks General…

Case

Wage of Failure: the ethics of executive
Compensation

For the last couple of weeks General
Global, a prominent multinational electronics and telecommunications company,
was being scolded by editorials in the mainstream press. Its departing CEO,
Bill Hogson, had exited with 2 years’ pay and bonuses totaling $100 million
after working barely a year. Hogson had presided over a tumultuous and
lackluster year for which most of General Global executives thought he was to
blame. Hogson was finally choosing to step down after a bitter power struggle
involving his firing of several top

Case

Wage of Failure: the ethics of executive
Compensation

For the last couple of weeks General
Global, a prominent multinational electronics and telecommunications company,
was being scolded by editorials in the mainstream press. Its departing CEO,
Bill Hogson, had exited with 2 years’ pay and bonuses totaling $100 million
after working barely a year. Hogson had presided over a tumultuous and
lackluster year for which most of General Global executives thought he was to
blame. Hogson was finally choosing to step down after a bitter power struggle
involving his firing of several top executives, many of whom were now being
rehired by the board. The press saw Hogson’s generous exit compensation for
doing a poor job as a testament to the dauntless greed infecting the highest
levels of corporate America.

Hogson’s replacement was Janice White, the previous CFO who Hogson had fired
only a month earlier. In the face of mounting public outrage over exorbitant
executive compensation packages for poor leadership, White has asked the board
to base her yearly compensation solely on performance. This was a clear break
from General Global’s policy of paying the average of industry standard. But
White felt this change was necessary to send a strong message to the stake-
holders that she too would share the burden should the company have to further
tighten its belt. Several hundred employees had already been laid off, and many
considered that unfair since those layoffs represented the lion’s share of
Hogson’s stratospheric exit package.

Initially, White’s request for a merit-based salary seemed a laudable act of
courage and integrity. But when a decision had to be made on whether or not to
grant her request, several concerns arose at the meeting:

1. Should all the top executives also be paid accordingly?

2. Should there be a cap on total yearly
compensation?

3. Would making such changes put the
company at a disadvantage when competing for the best talent?

4. Could such changes make the company less
stable?

Some thought it would make little sense to
base the CEO’s salary on performance without doing the same for all executives.
But doing so might prove difficult since it is not always clear how responsible
each and everyone is for the company’s successes and failures. The CEO,
however, sets the agenda and direction of each fiscal year and, thus, seems
ultimately most responsible for the consequences. So, paying her according to
merit did not necessarily require everyone else to be paid that way as well.

What about a cap on total yearly compensation? Critics in the press argued that
no individual should be making $50 million dollars a year, even if deserved.
That money could always be better spent elsewhere in year-end bonuses for
employees, increasing stock value, etc. But any such cap might make it more
difficult to compete for the best talent in the future. It was important to
remember that the millions earned in executive compensation were always
reinvested into the economy, which in turn benefited everyone.

Perhaps a compromise was reachable between these conflicting concerns. Basing
CEO compensation entirely on performance but without caps would keep the
company’s talent searches competitive by preserving the specter of achieving
great wealth. At the same time, it would inspire the CEO to do the best job
possible since she would thereby have more to lose by performing poorly

Furthermore, this solution would promote loyalty across the company since
everyone would know that even the CEO’s salary would be on the chopping block
if profits faltered. Still, there was one last, important concern. Making such
a radical change might actually risk long-term stability. If, for example,
White underperformed one year, she would likely redouble her efforts in order
to compensate for that personal loss of wealth. But what if, despite her efforts,
she underperformed the next year as well? Would she be as likely to leave
before inflicting further damage on the company? Without a lucrative exit
package, she might very well choose to stay on board longer despite her poor
track record, to the detriment of the company. High exit compensation packages
have the virtue of allowing poor leaders to resign earlier than later, sparing
the company any further poor decision making.

It is one thing to inspire the CEO to outdo herself, but quite another to give
her hope against hope. No company should seek to motivate an underperforming
leader to stay on. Unfortunately, given the political influence of the CEO in
the corporation, top executives and shareholders cannot always be relied upon
to fire that person. It can often take several years of failure to muster
enough courage in the ranks to do so. As General Global’s last CEO proved, many
executives risked losing their own jobs in the process with no certainty of
ever regaining them. Hence there was perhaps an advantage to giving a CEO the
luxury of a lucrative exit package in order to increase the chances that, if
need be, she might choose to step down, without bringing the company down with
her.

Was the answer then to simply deny Janice White’s seemingly noble request for
performance based pay? Or would it make sense to accept her request but
preserve a relatively high exit package that could double or even triple her
compensation for a disappointing performance? Or would that create a
disincentive to perform well? This was turning out to be a much more
confounding dilemma than it seemed at first. A decision needs to be made
nonetheless. What should it be?

discussion Questions

1. Do you think executive compensation is
generally appropriate or inflated in the United States? Why or why not?

2. Is performance-based pay an attractive
solution? Are there any other alternatives to keep from rewarding failure? What
are the costs and benefits to these solutions?

3. Are the long-term effects of CEO
performance always clear at the end of each fiscal year?

4. Can certain performance-based pay plans
make it less likely for CEOs to artificially inflate stock value in the short
term? If so, how? If not, why not?

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