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Article: Rewarding Failure: Part One Related Resources

Rewarding Failure: Part One
by Ted Sares

Wallace Malone is retiring as Vice Chairman from Wachovia Corporation with a sweet and juicy departure package worth at least $ 135 million. This amount probably will be increased (grossed up) so the poor fellow will not have to fret over paying any income tax on the $135. Incredible, even for doing a good job. But what about those who fail?

What about the story from Walt Disney's Magic Kingdom and Michael Eisner, the former CEO who once encouraged the potential payment of a $140 million golden parachute for Michael Ovitz, his friend who lasted just 14 months as his deputy. Eisner himself left last year with a package worth nearly $24 million excluding a $300,000 annuity for life. In fact, most severance packages of this nature contain a dazzling array of other sweet benefits.....everything from use of private corporate jets to lucrative consulting contracts, from secretaries to office space for life, from country club memberships to financial planning help. There are limitless goodies executives seem to enjoy in "forced retirement" at the expense of shareholders. Ever increasing severance packages granted to terminated or otherwise departing executives are a part of the growing perception that total compensatory reward is out of sync with performance or lack thereof.

Stephen C. Hilbert, the former CEO of Conseco almost drove that company into bankruptcy but was given $47.1 million in severance. Poor Carly Fiorina left Hewlett-Packard with a tarnished reputation, but her exit package eased her pain. It was worth about $21 million. "This is nothing beyond the normal severance we give to senior executives," says HP company spokesman Mike Moeller. How sweet is that? Doug Ivester, former chairman of Coca-Cola, left under a similar dark cloud but to bring in a little sunshine, his severance approached $120 million. Jill Barad, former CEO of Mattel, departed with $55 million after being fired for her poor performance. Robert Annnziata left the CEO post of Global Crossing in just one year with $15.9. L. Dennis Kozlowski of Tyco and New Hampshire infamy was on schedule to get as much as $117 million before he was indicted and convicted for corporate wrongdoing. Incredibly, Tyco agreed to pay a severance package of $44.8 million to Mark Swartz, its former chief financial officer, even while he was under investigation by a grand jury in New York that later indicted him on criminal charges. (Drury, Jim. It Pays to Fail, 9/16/02, The agreement was signed by two members of Tyco's compensation committee one of whom was Stephen W. Foss, former chairman of the New Hampshire Port Authority who later ran into his own serious problems of wrongdoing. (Feingold, Jeff. In the Wrong Place at the Wrong Time. NH Business Review. 10/17/02. 14b).

Franklin Raines was forced out as Fannie Mae's chief executive after only five years but will receive a pension of $1.3 million a year for life for his poor performance, though the payment is being disputed. Nice pension for just five years of work. New York Stock Exchange chairman and chief executive Richard Grasso "resigned" on Sept. 17 at an emergency meeting of the NYSE Board which voted for his ouster. The forced resignation came only three weeks after the same board disclosed their earlier pay out of $140 million in deferred compensation and retirement benefits to Grasso, at that time praising him for his "outstanding leadership."

And the beat goes on and on with other examples of corporate scoundrels at the trough too numerous to cite in this column. These episodes seem to be classic examples of how powerful people can bend or rewrite the rules to fit the games they play and somehow rationalize it.

Now no one is arguing that traditional and competitive severance packages are not important or necessary, but many of the excessive ones are incomprehensibly triggered when executives are getting fired for poor performance. These kinds of payments reflect a callous disregard for those in the office cubicles or on the factory floors most of whom are shown the door when they get fired. That others get fired and get enormous payoffs has become a hot topic of examination, particularly during the past few years which some have called the period of "Corporate Greed." Indeed, such juicy packages often reflect the kind of companies that pay them. More importantly, they may be indicative that the company's Board is not overseeing management close enough. Thus, the real issue may be whether the outcry against excessive severance has resonated with corporate boards who control the corporate cash register and who should be looking out for the shareholders, notwithstanding the Sarbanes-Oxley Act of 2002.

If executives are paid more for high performance because their compensation is supposedly tied to performance, then logic dictates they should get less in the way of severance for poor performance. Why should a top executive knock himself out to perform well when he or she may end up with more money by simply working toward failure? Why not manipulate circumstances so you can be rewarded for failure? It is not at all unusual for some executives to move from company to company leaving each"to persue personal interests" but with generous severance for their serial failure. Eventually, if they fail enough times, they can end up with a nice chunk of cash which then can be annuitized for a comfortable retirement in Sedona, Palm Beach or Telluride......or perhaps all three.

Excess severance payments were just one of the many symptoms of the corporate accounting scandals that occurred between 2001 and 2003. Many view Enron as the poster child for this period though technically the jury is still out (pardon the double entendre). If so, it is noteworthy that only three people, James Chanos, Jonathon Weil and Bethany Mclean, spoke up against Enron early on, Perhaps the real question to ponder is where were the others. And where are they now with respect to execessive severance payments, for rarely have so few been so highly paid for doing so little for their companies, shareholders and employees?

"If ethics are poor at the top, that behavior is copied down through the organization." Robert Noyce, inventor of the silicon chip

Ted Sares may be contacted at

Ted Sares is a private investor who lives and wites in the White Mountain area of Northern New Hampshire with his wife Holly and dogs Kater and Jackdog. He writes a bi-weekly column for a local newspaper and many of his other pieces are widely published.


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