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Rewarding C.E.O.'s Who Fail

Publication Date: 
October 01, 2011
The New York Times
James B. Stewart

Professor John Donohue spoke with James B. Stewart in the below New York Times article on the irony that chief executives who fail are still lavished with millions in compensation.

Léo Apotheker’s short, turbulent reign as the chief executive of Hewlett-Packard was by nearly all accounts a disaster. The board demanded his resignation, and if ever there was a case for firing someone for cause, this would seem to be it.

So why is H.P. paying Mr. Apotheker more than $13 million in termination benefits?

Just three years after the financial crisis generated widespread public outrage that Wall Street chief executives walked away with hundreds of millions in bonuses and other compensation after driving their companies into insolvency and plunging the nation’s economy into crisis, multimillion-dollar pay for failure is flourishing like never before. H.P. is simply the latest example, albeit an especially egregious one. It’s hard to fault Mr. Apotheker for taking what H.P. offered. But among the many questions shareholders should be asking the board is why it approved an employment agreement for Mr. Apotheker that arguably made it more lucrative for him to fail — and the sooner the better — than to succeed.

“It’s a great irony that spectacular failure is rewarded lavishly,” John J. Donohue, a professor at Stanford law school and the president of the American Law and Economics Association, told me. “It is a terrible mistake to set up a structure where the top person walks away with millions even if the company is laid waste by their poor decision-making, yet this is what’s happening. It’s a shocking departure from capitalist incentives if you lavish riches on the losers.”


Mr. Delikat readily concedes that Mr. Apotheker may not have been an Alex Rodriguez, and “that the rationale may not apply to him,” since he’d been fired from his previous position as chief executive of the German software giant SAP (after just seven months). Mr. Donohue goes even further: “There’s absolutely no empirical support for the idea that people won’t move unless they get a lavish severance agreement. There may be some exceptional talents that need to be coaxed, but the idea that most executives need this is unbelievable. If you’re a top executive in Silicon Valley, to become the head of H.P., the largest computer company in the world, is a coup. You don’t need to be paid for failure.”

Most people strive to better their circumstances by taking chances, often changing jobs without any guarantees that should they fail, they’ll be paid anything — let alone lavishly. That, as Mr. Donohue points out, is the essence of capitalism. “Imagine if you were applying for a job, and you said, ‘I want to make it clear that if I do a terrible job, I want to walk away with a ton of money.’ Do you think you’d get hired? Yet that’s now standard practice in negotiating executive compensation.”