No wonder the gap between what the ‘average’ person earns and what top executives earn is growing. Today we hear the CEO of HP is being replaced and is walking away with a $25 million payout. WTF! The stock price of HP under Apotheker has plummeted (40% down this year alone). When employing Leo Apotheker just under a year ago HP issued a statement that ‘now we have the best team to realize the company’s enormous potential’. Yeah right!
Dan Ariely, the behavioral economist, implies the link between CEO performance to an organizations performance;
In the last year I’ve asked many board members how much of a company’s stock value they think should be attributed to the CEO’s strength, and the answer is surprising. They estimate that you’ll get about 10% more stock value, on average, from a good CEO than from a mediocre one.
Certainly some governments have looked into interfering with these rewards of failure in business. For example, a decade back the UK House of Commons Trade and Industry Committee issued a Green Paper as “it appeared [that] directors who had presided over a significant loss in the value of a company had left the company with an exceptionally large redundancy package. The impression given was that they had been amply rewarded for failure”. I certainly don’t believe that the government should be interfering in business as just look what happened when the US government interfered in home loan markets.
The question really is, what is it going to take for companies to stop rewarding failure. If someone is paid $25 million to fail then what incentive is there for them to actually do a good job?
P.S. Related, but as an aside, I’m a great fan of Drucker and his Management by Objectives(MBO). There are many negative criticisms of MBO however, in my opinion, these criticisms are often misplaced and the true nature of MBO is misunderstood by the criticizing party. One of these criticisms is in the book
‘Peter F. Drucker: critical evaluations in business and management, Volume 1’ by John Cunningham Wood and Michael C. Wood where they write “The MBO “contract” is theoretically defective … there is no return committment to give him reward for success. Rather there is a vague expectancy of punishment for failure”. For executives, perhaps the executives should suffer punishment for failure rather than reward as in the case of HP.