Today’s post is another from my discussion assignments for the Principles of Management class at Umass-Amherst. I’m still in finals week right now for the Marketing and Stats classes I’m currently taking so I won’t have much time to post anything else. Today’s post is relevant to an event that occurred a few days ago at my job. State Street acquired IBT a few months ago and this week let go of 450 people from State Street and IBT; there were rumors that these 450 employees were let go without severance pay but fortunately for them, they will be getting severance pay. Unfortunately for those terminated employees, their severance pay will never match the ridiculous packages some CEO’s receive.
Right when I saw the headline, I knew I had to choose this article. Three paragraphs in, this quote, "Time and time again, the smoking gun of any major compensation problem is in the form of a contract that was executed at a earlier date" by Patrick McGurn of Institutional ShareHolder Services, a proxy advisory firm, confirmed my initial reaction. The article titled, Hire by the Contract Now, Risk a Big Regret Later, was written by Eric Dash and published in today’s edition of The New York Times [January 12, 2007]. The article deals with guaranteeing high ranking officers of a company a certain amount of money if they are fired or forced out of the company.
Just to give everyone an idea of the sheer ridiculous numbers we are dealing with, I’d like to list some of the severance salaries guaranteed:
- average American worker, two weeks salary per year worked
- average chief executive without a contract, 18 weeks salary per year worked
- Home Depot, Mr. Nardelli, 568 weeks salary per year worked
- Walt Disney Company, Michael D. Esiner, 536 weeks salary per year worked
- Walt Disney Company, Michael Ovitz, 5,000 weeks salary per year worked!!!
These figures may shed some new light on why the MBA ethics program at Harvard (Harvard raises its hand on ethics) plans to focus at least some of its time on executive compensation and the ethical issues associated with a culture that rewards it leaders so much. The sheer size of some of these buyouts serves to further compound the problem; for instance Mr. Nardelli recently received a severance package worth $210 million! I’ll be honest, with a payout that high I would be very tempted to pull a "George Costanza" and purposely attempt to get fired! You’d almost be a fool not to!
Clearly, in negotiating these contracts the CEOs are using a classical view of responsibility and only focusing on their profits. They’re not using either of the views of responsibility in terms of the company as the organization’s profits are decreased and society’s welfare does not improve when CEOs fail at their jobs and are REWARDED for it; however, if we view the CEO as a business (of one) then they’re clearly looking out for their own profits above all else. A claim could be made that top ranking officials are trying to be socially responsible to the company and stakeholders by reducing the time it takes to severe ties with the company in case of a fallout, but it’s a very tough (morally and factually) position to defend. In terms of the views of ethics, rights view, in the sense that CEOs are making the decision to sign these contracts because the outcome is beneficial to them and is protecting their individual welfare, and integrative social contracts theory, as having severance contracts for CEOs is common across a broad spectrum of businesses, are the two main views at play here.
The structural variables here are weak, as the internal decision-makers involved in approving an incoming CEO’s severance contract are usually conflicted. In addition, as the article points out, "The problem is compounded, critics charge, by directors who often have close personal ties to the chief executive or are being advised by a general counsel who will call the man at the other side of the table ‘boss’ the following week", a company’s board of directors commonly have people serving who are friends with the CEO candidate and as such are very open to helping their friend out through a generous severance package. The article also makes a very good point that the counsels are conflicted as they do not want to upset their potential future boss. Many of the corporations cited in the article are large, prosperous companies where the culture most likely favors having a CEO with great perks and bonuses as it gives regular employees a goal to strive for. It also displays a positive image to the investing community, as a company that can afford to pay its CEO a high salary with a generous severance package must be doing well. Culture can also be a deterrent to a severance package, as Mr. Perez of Wrigley notes, "If you know the people you are going to be working for, if you have a good feel for the culture, and if you think your performance will be objectively assessed, why do you need a contract?"
Ego strength and locus of control (defined on page 112 of the textbook) are both highly applicable to the issue at hand in this article. The article cites several officers who negotiate a fair severance package because their strong convictions cause them to act in way that is fair to them and the other stakeholders in the company (employees, shareholders, and competitors). From the article, "At Intuit…Stephen M Bennet…is entitled to severance pay equal to six months his current salary" that might seem high but note it is not related to how many years he’s worked, Mr. Bennet will receive six months of his salary whether he works there for one or ten years! Also, "Walgreen and Whole Foods hold the line on large change-in-control payouts." Notice that’s two of the companies on Forbes 25 best managed list, don’t be surprised to see a few more familiar companies pop up! James Dimon of Bank One also exercised his ethical convictions when he "voluntarily scrapped his contract’s income guarantee and declined to take the $2.5 million cash portion of his bonus." The orientation of one’s locus of control also seems to have an effect on whether a CEO wants a severance package, those who believe they control whether they will be fired will not think they need a severance package and vice versa.
One of the ways the textbook suggests improving ethical behavior is through top management’s leadership and I couldn’t agree more. On page 117, Robbins and Coulter note "…the top managers…uphold the shared values and set the cultural tone. They’re role models in terms of both words and actions…"; but how can managers lead on the fairness of their salaries? One way is to integrate it into the company’s organization-wide compensation practices, as Kenneth D. Lewis, CEO of Bank of America [another Forbes top 25 company] notes "’I don’t understand why a C.E.O. should have a safety net when others don’t"’, participating in the values you are promoting to the rest of the company encourages all employees to act ethically. In this sense, a focus on the moral development of potential executives is a key method to preventing unethically high severance packages (which may encourage executives to get fired), as people on the principled level and above will attempt to separate themselves from the group standard and exceed expectations, in this case by declining high bonuses and severance packages or at least accepting only modest and fair ones that are equitable to their contribution to the company.