Can ELI5 why do investors (owners of the company) accept CEO's pay packages that involve golden parachutes? It doesn't make sense to me (I mean, it might in case of offensive takeovers, but who's gonna take over Boeing?!)
> why do investors (owners of the company) accept CEO's pay packages that involve golden parachutes
My understanding is that this is seen as a cost of acquiring the right expertise. “Pay peanuts, get monkeys” kinda thing. They want the best of the best, and according to their perception these people can do a number of things with their time. Why would they work on this thing instead of their own thing, or a number of other people’s things? By choosing to work with you they close other doors in their life, so you need to both sweeten the deal and make the risk of things not working out between you reasonably low. Not so low that the expert is not incentivised to work hard for you, but low enough that you can convince someone to risk it getting in business with you.
In short they agree to it because if they don’t they can’t get the right caliber of person through the door.
The shareholders would be better off if they promised a $800m incentives-based / performance-based package (e.g. stock options etc.) than promising $80m if the CEO performance sucks.
And any CEO rejecting this offer, is a huge red flag.
> would be better off if they promised a $800m incentives-based / performance-based package (e.g. stock options etc.) than promising $80m if the CEO performance sucks.
I don’t know about the relative ratios between the two but i believe you need both.
From a perspective of a succesfull CEO candidate with a proven track record joining your company is risky. There might be something structurally wrong with your industry, or there might be some “ticking bomb” with your business (like some hidden technological flaw, or personality conflict, or regulatory/compliance risk, or the risk of some catastrophy hitting your factories/offices) Many of these are already present before the CEO candidate joins and there is nothing they can do about them.
Basically your business might stink and “explode” in the face of the new CEO. On the other hand the CEO candidate presumably have some other options. You are usually not recruiting CEOs from the literal bread line.
Let’s think through a concrete example. You tomp is a succesfull business person and you estimate you will conservatively earn $200m in the next 5 years. You have unique skills and they offer you a chance to become the CEO of Boeing today. You have what you belive is a good plan to restore Boeing to its former glory and the pay package will net you if everything goes well $800m in the same time frame. Sounds good, isn’t it? But you are worried that some gizmo in the airplanes already out of the factory might have some flaw. Maybe costs were cut and maybe some part you have never even heard about fails, kills a few thousand people a year after you joined and tanks the whole company. You don’t know what is the chance of that happening, nobody knows. What you know is that if that happens you will earn in your estimate $0. If that happens you might need to sell off your yacth, and tell your daughter she has to drop out of that lovely swiss private school she loves so much.
I didn't suggest no compensation. Obviously I would want to be paid some base salary, comparable with whatever I could earn elsewhere ($1m / year? $1m / month? etc.)
But instead of a $80m golden parachute (failure reward), I'd offer $800m options (success reward).
I am not sure that this will work unless the company is considered a highly desirable place to work for. A prospective CEO might simply walk over to another company which has a more lucrative deal. So you might end up with people who are either desperate, or those who are highly able and see that as a challenge. The second might be very rare.
I'm not saying it is a bad idea, but CEOs face the same problem as politicians - while they are responsible for whatever happens (good and bad) they are not actually in control of very much.
A bad CEO can destroy a company in a few years. A good one can set up years of profits. But the "can" there does some heavy lifting - sometimes a CEO will walk in to a company and there just won't be any opportunities. Eg, you take over a restaurant chain then the COVID overreaction happens. Not much the CEO can do.
Long and short, I can see why a good CEO might go for guaranteed compensation rather than big payoffs for good results. They can't guarantee good results. Nobody can make that sort of promise.
Corporate boards are a notoriously small world. These are buddy deals. Global corporations reap structural harvests and the guy who gets to be on top gets the prize. Their network is their biggest asset. It helps a corporation to have well connected board members, CEOs and directors, sure. So they get paid for it. Network effects -> winner takes all.
You don't screw over your peers. Those that control the big investment funds or have a private fortune probably liked having a golden parachute themselves at some point.
Same as when normal people quit a job they don't like it's better to go quietly and be glad you are out rather than burn bridges.
The small shareholders don't have enough shares to make an impact and the large shareholders view it as a cost of doing business. Remember, they aren't investing in moral outcomes, just profits. With the DoD funding Boeing in perpetuity, there is zero incentive or consequences, so it's still a "good" investment...for now.
Because the people they want have options. If you want a hotshot CEO who could go and work for Google and make tens of millions per year, you have to sweeten the pot to get them to accept.
So they have golden parachutes which say "for any reason, except fraud or other criminal actions, we guarantee you'll get $X millions when you leave".
I think it's because when they get the contractually guaranteed "golden parachute", the board thinks this CEO is gonna work out great so why argue, and since it's not at all uncommon it doesn't seem like a red flag at all; it's the norm. By the time it actually happens, they have a contract that says it will happen, which is rarely overturned.
The world is not overflowing with people who can even theoretically lead a $77bn company and will be acceptable candidates in the eyes of the board/shareholders. So you will need to pay accordingly if you want one.
It's like wondering why pro sports teams give megabucks guaranteed contracts to superstars. There aren't a lot of them and there is a lot of money at stake when it comes to running a successful pro sports team. So they cost a lot of money to acquire.
I am by no means defending this. Whether or not one thinks there are better alternatives to capitalism, it's hard to deny that capitalism produces some pretty crap outcomes.
> The world is not overflowing with people who can even theoretically lead a $77bn company
I strongly disagree. It's a matter of surrounding yourself with capable people and there's a huge factor of financial inertia. I guarantee you most HN-ers could run Google or Apple for 5 years without causing their value to plummet.
A company in good financial shape with strong positive inertia? Sure, but I don't know that describes Boeing at the time of his hire. (Maybe it does, not sure)
I still don't necessarily disagree, but you left out the second part of my sentence which is rather significant:
"and will be acceptable candidates in the eyes of the board/shareholders."
Sure, Random HN User #587942 might be a decent Apple CEO. Hell, they might even make a great POTUS. Aside from having one's finger on the nuclear button, I think a POTUS is primarily a strong delegator in much the sense that a CEO is.
That doesn't mean they are going to be remotely acceptable as a candidate in the eyes of the board + shareholders. Nobody is going to stick their neck out for Random HN User #587942. They are going to pick somebody with a positive track record of leading big companies.
This isn't ideal! I'm not defending it. I'm just saying why it happens. It's the C-suite equivalent of "nobody ever got fired for buying IBM."
In addition to that, companies want CEOs to take some level of risk to grow the company, And to take the fall when needed for bad decisions / press / accidents and incidents. The golden parachute, as is my understanding, is an all but explicit pay to take responsibility and be the fall guy / resign with many a hollow sounding apology letter when and as needed from shareholder perspective (which may not overlap from our own perspective on when that would be needed or appropriate).
Plus everything op said about capitalism and market.
I keep seeing "responsibility" brought up but what responsibility do you mean? I have never seen a CEO suffering unpleasant consequences of their own failures. It's always a golden parachute and failing upwards for these people.
