Thursday, December 28, 2006

Executive Severance

I'm not going to get into the issue of executive compensation (yet), though I will say the number of executives I've met or heard of who actually have the impact implied by their compensation is vanishingly small. No, can we talk about executive severance instead? Good.

Here's the thing: severance is meant to recognize the efforts a person has put into the company and smooth the transition to a new job. If someone gets axed because of changed business circumstances, I think it's right to compensate them for that in a way that eases the pain while allowing the company to get on with those changed circumstances. If a company gets bought and an executive is redundant, the same principles should apply; one shouldn't avoid making the right decision for the shareholders because one is afraid of suddenly being out of a job.

But what about when an executive isn't doing what they're supposed to be doing, or doesn't agree with where the company is going? Anyone else would be fired, or would resign and go find work somewhere else. Strangely, though, this doesn't seem to happen in the executive ranks, where salary anywhere from 6 months to 18 months, plus other perks seems to be the rule. At my previous company we had

  • The VP of engineering who couldn't make a decision and whose directors spent a lot of time talking among themselves figuring out how to get around the VP so stuff could actually happen; dude got dismissed with 6 months salary and went off rock-climbing for a while. I'm pretty sure we never called him up for assistance during that "transition period"
  • The VP of Operations (as in data center operations) who hadn't a clue about computer networks, spent more time trying to sneak favorable (and exceptional) stock option grants for himself (in his role as General Counsel) past the CEO, and got fired for incompetence. 6 months severance because, being a lawyer, he was happy to sue the company and the board determined that legal costs would be more than the 6-months' salary.
  • The VP of Sales who went to the board to tell them he could run the company way better than the current CEO, only to find that they thought things were going quite fine. He stayed on the payroll, not doing anything for the company, until he found a job someplace else.

You would think that reading about the myriad other companies where this crap goes on would make me feel better about this stuff, but it doesn't. I am mystified as to why these institutional investors that own most of these companies are willing to put up with it. All I can think is that (a) they deal with large amounts of money, so these numbers don't seem so large, and (b) it's only a couple people at a time; lord knows if the company were so generous with the rank-and-file when they laid them off, there'd be hell to pay. Just ask the workers at Delphi.

What is the point of all my rambling? It is this: where is the incentive for the executive to perform well, if they know that should they be dismissed for doing a poor job, they're going to continue with their already-large salary for a nice long time? So many people are motivated to work extra hard, even when trying to meet ridiculous goals set by executives who have no real sense of the level of effort involved, because they're afraid if they don't do what they're told, they'll be fired, often with no severance at all. Have executives somehow risen above such base concerns that they wouldn't be similarly motivated? Hardly.

Ridiculous executive severance remains because it's set by executives who like that perk of their own jobs. But the company would be better served by a little fear in the executive wing. Indeed it would.