
How Badly Must a C.E.O. Behave Before Pay Is Clawed Back? - JumpCrisscross
https://www.nytimes.com/2017/06/09/business/united-airlines-ceo-scandal-lawsuit.html
======
wccrawford
As a novice programmer, I once declined a position that had a contract that
stated I would be responsible for all monetary harm if I were to leak
information about the project.

As I was being paid peanuts, and the project was worth millions, I knew I
couldn't take any chances with that. I looked into insurance, but it would
have cost over half the pay that was already peanuts.

The problem wasn't that I was worried I'd slip up, or that I'd do something
unethical. My worry was that the company would do something unethical and
blame it on me somehow.

If I were applying for a CEO position and saw a clause like this, I'd refuse
to sign that contract, too. So United isn't wrong... There are definitely
people who would refuse to work for them if they put that clause in the
contract.

~~~
xoa
> _that stated I would be responsible for all monetary harm if I were to leak
> information about the project_

> _If I were applying for a CEO position and saw a clause like this, I 'd
> refuse to sign that contract, too. So United isn't wrong..._

I might be reading it incorrectly, but I think there is a very big difference
between capped and _uncapped_ liability/penalty clauses. What you seem to be
describing facing sounds like the latter, and yes that should give absolutely
anyone, anywhere, in any situation, the screaming hibbie-jibbies. I think
looking for that sort of clause, which can be subtle, is probably one of the
more important things when going over any contract. As long as liability is
limited the rest can be planned out, but of course nobody can sanely deal with
infinities. On a larger level that's the fundamental point behind limited
liability corporations, the bankruptcy code, hard learned principles regarding
the non-inheritability of debt, and so forth.

But I don't think that's the same thing as a pay clawback, which is
fundamentally capped. "You break the law, you face a maximum (with us) penalty
of your salary for those years" doesn't seem unreasonable at all at c-level.
They're not being asked to take retroactive responsibility for something
amorphous like "failure", nor is the sum unbounded or affecting their personal
net worth before taking the job, or even for that matter touching any money
they made using their holding of that salary before the clawback like
interest/investments. It feels like a reasonable deal: don't commit and
(company related at least) felonies while on the job, if you do then your
contract of employment was voided at that time and the company wants its money
back. Again looking to corporate liability limitations, they don't apply if
someone purposefully pierces the corporate veil for example. It's not supposed
to be a shield against serious breaking of the law.

I can see how some clawback terms could go way too far, with trigger clauses
being too fuzzy, penalties not bearing reasonable relation to the violation,
or both, but I'm not sure the concept itself is theoretically bankrupt.

~~~
stale2002
Maybe it is "fair". But the problem is that the market doesn't care about
"fair".

Personally, I would absolutely refuse to sign such an agreement.

You can't force people to accept your contract. If all the good CEOs look at
your contract and run away.... well now you are stuck with only bad CEOs who
were desperate enough to agree to your contract. That is the market speaking.

~~~
hedora
It sounds like the lawsuit against United focuses on payments from a bonus
program and a severance package.

If you have ever taken a job, you have signed an agreement that limits
payments of performance bonuses and severance packages in the case of gross
misconduct.

I suspect the employment agreements for the executives in this case included
such clauses. The board failed to enforce them at an expense of millions of
dollars. The investors are right to sue.

------
xxSparkleSxx
>In a letter to the pension fund, a lawyer for United explained that it would
harm the company to give the board “unfettered discretion to recoup
compensation” in cases involving wrongdoing. “Where such discretion is out of
step with industry norms,” the letter said, it would “make it difficult for
United to recruit and retain top talent, particularly at the senior management
level.”

So United thinks that the threat of "punishment" (or really, not getting a
huge payout) because of breaking the law would make them an unattractive
company to people at the senior management level.

Barring the morality of it, is this statement true for anyone who qualifies as
senior management? Would this deter you from taking a job at United?

If this statement is true, we likely need to do a major overhaul of the type
of people we allow into senior management. If it's not true, I'm thinking this
is another harmful practice brought about by the incestuous nature of board
members and senior management across companies. Which is again, something else
that needs a major overhaul.

~~~
archildress
You're not wrong, but if you are a top Senior Level exec being recruited and
only one company threatened you with compensation clawback, would you be more
or less likely to take that job over others?

~~~
rhizome
If a regular employee said they'd only work if the possibility of "firing for
cause" was taken off the table, would you think they were qualified?

~~~
kinkrtyavimoodh
I imagine it's a little difficult to compare the two because there is a
difference in bargaining power between a regular employee (who is closer to a
commodity) and a CEO candidate (for which the applicant pool is much smaller,
and company fit very important).

Secondly, a CEO, being the head of the company, could technically be held
'accountable' for hundreds of millions of dollars, and it'd be reasonable for
someone to want to shield themselves from such a liability, which might not
necessarily arise out of a violation of their own, but rather of the company.

~~~
Spooky23
In government, C-level people make less than $200k, usually a lot less, yet
seem to be able to competently lead organizations consisting of tens of
thousands of people. One commissioner of a multi-billion dollar agency that I
knew drove a late 90s Accord a few years ago.

They are also subject to invasive and strict ethics and disclosure rules
revolving door policies.

CEOs mint money because of social connections, not value to the business. The
board members who implicitly endorse graft should themselves be subject to
criminal sanction.

~~~
naasking
> CEOs mint money because of social connections, not value to the business.

Sure, the CEOs are themselves often on the boards of other corporations. The
incestuous nature of this top level is bordering on the absurd.

------
lsiebert
Apparently United won't take back bonuses even when it's CEO stepped down
during a federal corruption investigation, and claims it's because it's not
the normal industry practice and would make it hard to recruit top talent.

I'd think top talent would, you know, behave ethically, and not, for example
create a special mostly empty flight that's convenient for a politician just
to get a hanger in Newark approved.

~~~
gnaritas
> I'd think top talent would, you know, behave ethically

That's more likely a projection of how'd you'd behave in that situation that
it is a reality.

~~~
lsiebert
I'd want hiring and compensation tied to behaving ethically, if I was on
United's Board. I consider someone a better CEO if they don't become the
subject of a federal corruption investigation and have to step down.

He also seems to have tanked customer satisfaction ratings. He was CEO of UAL
from the beginning of the continental united merger in October 2010 to
September 8, 2015. Here's a relevant article.
[https://www.nytimes.com/2015/09/15/business/despite-shake-
up...](https://www.nytimes.com/2015/09/15/business/despite-shake-up-at-top-
united-faces-steep-climb.html)

Just because more CEOs are psychopaths doesn't mean that psychopaths are
better at doing the work of CEOs.

Frankly many CEOs seem to favor short term gains that benefit themselves and
their stock option grants over improving quality and long term growth. I don't
know that this guy is a psychopath, but I'm not interested in flying United if
I can help it.

~~~
gnaritas
I didn't mention psychopaths, however you implied a positive correlation
between ethical behavior of CEO's and being top talent; my questioning that
implication doesn't imply the opposite, it could be there is no correlation in
either direction.

------
Aloha
This may sound strange - but I don't think what the CEO of United did should
be a crime or is at all unethical - the unethical conduct was the demand of
what amounts to a defacto bribe by the head of the Port Authority.

Even then - 50 years ago it was commonplace to use cross-subsidization to fund
routes like this - the ICC would do it - "Okay, so you want to offer a route
from Newark to Los Angeles? Sure, we'll grant it, but you have to offer
service between Los Angeles and Tuscon, Santa Fe and Flagstaff as well."

Now admittedly, this doesn't pass the smell test - because the demanded
service was probably not in the public interest - but this kind of thinking
was used in the transportation industry for quite some time.

~~~
barrkel
In order to establish a set of norms in a community, it's not enough to punish
people who violate the norms; you need to punish people who don't punish
people who violate the norms. In other words, you need to watch the watchers.

To reframe that principle in this context, it's not enough to punish people
who ask for bribes. You need to punish people who answer those asks, rather
than reporting them.

~~~
coredog64
What we really want is to create incentives against corruption. If a public
servant asks you for a bribe, it should be legal to pay it. You are then in
the clear to turn around and report them. But making both parties equally
guilty leads to the initiator having power over the other. When that happens,
neither want to disclose except as part of mutual assured destruction.

------
FullMtlAlcoholc
>Faced with egregious executive behavior, directors should at minimum claw
back bonuses. Not to do so sends the message that there is impunity for
improper behavior at the top.”

American exceptionalism at its finest, where the more exceptional you are, the
more your behavior is excepted. If you really screw up, you may have to be put
under house arrest.

The only thing we will not except is stealing from the rich and powerful.
Madoff learned that the hard way.

------
mnm1
If you set a precedent of taking back pay from executives convicted of bribery
and other crimes, you won't be as competitive when hiring other criminals in
the future. That's essentially United's argument here. Gotta stay attractive
to future, potential criminals, after all.

~~~
Applejinx
Given recent studies about the economic costs of ethical behavior, I think you
could make a pretty ironclad case that criminals are more likely to generate
profit for the company under current conditions than ethical 'good' people
would.

As such, the larger the company and the more capital it's responsible for, the
MORE necessary it becomes to the company to find the most evil, biggest most
psychopathic criminal to guide it, given that profit is the only measurable
feature and the only thing that concerns the company in any way.

It's just the system. This is what you get, and betting against it is like
betting against the tide. They do in fact have to be competitive about hiring
bigger criminals because failing to do so can be fatal to the company, when
it's set against other companies with no such compunctions.

~~~
mnm1
So in other words, the law fails us once again. If we had serious criminal
penalties for taking bribes (and other executive "white collar" crimes) this
wouldn't be the case. Since we can't and won't implement reasonable criminal
justice policies in the US, how about a mandatory minimum of 10 (or 20, who's
counting at this point?) years in jail for any executive taking a bribe
without the possibility of parole? For every violation. And three strikes,
you're out. I guarantee you'd see a change quickly. Or, at least, more rich
white men in prison. And some would go in for life from the start (3 strikes).
It goes without saying that upon such a conviction, _all_ assets would be
seized and these people would not be allowed even a dollar to go towards their
lawyers. Just in case you had thoughts they'd get off because of high-priced
lawyers ... And just to top it all off, when you can't prove the case against
the executive who took bribes, you throw his wife in jail for 20-30 years
because she doesn't know what's going on and can't rat out the higher ups.

------
olingern
I worked for a toxic CEO roughly three years ago, and, to answer the article's
rhetorical question - he/she has to behave badly enough to hurt long time
investors' pockets.

I only made it a year under a micromanaged, 'everything is urgent'
environment. It all stemmed from the CEO. He was in every meeting, including
dev initiatives. Not only did he have no significant technical knowledge -- he
also lacked in areas where I would expect most CEOs to excel: market strategy,
branding, and finance management.

My exit was a large blow to the company, as a lot of co-workers saw me as the
unicorn who would 'fight the good fights' for everyone else. And, I did --
until my health started to decline from the stress.

The story ends with me perusing LinkedIn one day, after five+ former co-
workers had left, with him stepping down as CEO. He would have never made this
decision on his own (pride, control), so I know that external investors
definitely dictated this.

So, I would say pay gets clawed back when CEO's consistently make poor
business decisions and over promise/ under deliver to investors in order to
obtain more funding.

------
rectang
Even in the egregious Wells Fargo case, the executives whose pay was clawed
back were still money ahead to the tune of 8 figures (Tolstedt) or 9 figures
(Stumpf). Thousands of low-level employees were ruined, though.

Accountability is for the little people.

------
Shivetya
I am more concerned that a public figure can basically coerce if not blackmail
anyone and get a free year confinement in their own vacation home. that is
simple astounding.

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nickpsecurity
Responding to title, he has to wrong the elites that gave him that position
enough for them to take action. The elites are usually the board composed of
other people who benefit from overpaying CEO's. It's a club that helps each
other out. Piss off the club and you're gone. Same goes with Congress and
regulators to a degree.

~~~
Applejinx
What regulators?

~~~
nickpsecurity
An example would be how the SEC often ignores big players or gives them fines
that barely matter. However, they and everyone else will pile on a CEO that
pissed off big players in government.

------
makecheck
I want more companies to try something: take a random guy from your existing
non-management workers, pay him a nice but not exorbitant wage ($100k?), and
make him CEO. Then see if he can really do any more damage, or make any poorer
decision, than one of these hot-shot CEOs. Seriously, what do they have to
lose? Some CEOs seem to screw up everything imaginable and leave in 6 months;
isn't 6 months of $100k (i.e. $50k) worth the experiment instead?

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louithethrid
If a C.E.O. behaves badly enough, and the board had knowledge in there
ledgers- and did approve, because they did not read carefully enough- they
have become accomplices in a crime. Thus, compadres if you want for the omerta
to hold, you better dont want the paycheck to fold. We all paddle on in this
boat, or drown holding one anothers throat- thats the choice.

Its the same mechanism that holds together corruption networks, basically
everyone has the gun trained on everyone - a giant Ponzi scheme, where every
new member can expect money, and the originators have to come up with ever
greater sum to silence the mexican standoff.

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OliverJones
The have a board member who's an exec at the well-known NGO Partners In
Health. It's hard to imagine a better-run org. Maybe the disgraced executives
should consider making large-scale donations to PIH.

Of course, that doesn't make the shareholders whole.

As for the "hard to recruit and retain top talent" argument ... that's the
oldest and most miserable excuse in the book for tolerating bad execs.

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plink
I thought Trump said he was waving his pay.

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nixpulvis
Like `this`.

