How to Explain Failure of American Businesses - Fired Executives Continue to Get Huge Severance Pay

Rewarding Failure is the American Business Model

The Dismal Political Economist has commented on the huge severance package that a recently terminated Sara Lee executive received.  Lest some view this as the exception, there is this report from the New York Times on the excessive severance payments that failed executives get when they are gracious enough to leave the companies they have made a mess of.



James Best Jr./The New York Times



Conservatives have often said that they oppose unemployment compensation because if you pay more for something, you get more of it.  They mean that in their minds if you pay people who are unemployed the result is more unemployment.  It's a good convenient excuse for cutting benefits for the unemployed.

Using this same argument one supposes they would agree that if you pay people for business and management failure, you get more business and management failure. 

Well, the “paying more” part is certainly correct.

Everyone knows of the travails of Hewlett Packard.  What everyone might not know is this

Léo Apotheker was shown the door after a tumultuous 11-month run atop Hewlett-Packard. His reward? $13.2 million in cash and stock severance, in addition to a sign-on package worth about $10 million, according to a corporate filing on Thursday.

Wow, more than $1 million a month in severance for the 11 months he served, plus a “sign on package” for another $900,000 a month for those 11 months.  How exactly does one get a “sign on package” for being told to sign out?

Mr. Apotheker can find and share misery with other failed executives. 

At the end of August, Robert P. Kelly was handed severance worth $17.2 million in cash and stock when he was ousted as chief executive of Bank of New York Mellon after clashing with board members and senior managers. A few days later, Carol A. Bartz took home nearly $10 million from Yahoo after being fired from the troubled search giant.

Is there any good news.  Well yes, the packages are coming down, way down.

Practices such as large cash payouts and having shareholders pay the tax bill for departing executives are on the decline, especially after the uproar over the $200 million-plus exit packages of Hank McKinnell of Pfizer and Robert Nardelli of Home Depot in the last decade.

But before anyone gets ecstatic that failed executives are only getting about $10 to $20 million when they leave, look at what you get if you preside over a coal mine disaster that resulted in many deaths.

The chief executive at Massey Energy was awarded a large severance contract despite presiding over a company barraged with accusations of reckless conduct and with legal claims stemming from one of the deadliest mining disasters in memory. In June, Baxter F. Phillips Jr. was awarded nearly $14 million in cash and stock severance

Mr. Phillips certainly feels very bad about the miners who died working for his company, but it is good to know he has a $14 million severance payment to help console him.  The families of the victims, not quite as much.