Time and again, we see CEOs and similar executives make horrible decisions that massively damage a company both financially and in terms of reputation and the perpetrator is forced to resign, yet receives so much money as a going away present you'd think they're being rewarded for their fuck up. Why??
Because the people that set compensation is the board of directors, and they are composed of other executives. They want to set the precedent for themselves.
Correct, also execs have strong bargaining power and entire industry of advisors to advocate for their comp.
This is opposed to wage slaves who are atomized and forced to negotiate for themselves while most industries collude to fix their wage. Many industries share their salary data to third party aggregator who will in turn provide reports that enable companies to fix wages for specific professions/industries. This is illegal but as you might know, government does enforce rules against "legal people" only organics who are of "lower quality"
Essentially, there aren't a lot of candidates for roles like "CEO" at really large companies, so they want to attract the best candidate from a limited pool. Those people get to ask for whatever crazy thing they want if the board really wants them, and golden parachutes aren't illegal, so why not?
Are you saying that these CEOs have it in their contracts that they get a ridiculous amount of money if they fuck up enough to get fired? Doesn't that incentivize them to be reckless?
No candidate for those jobs ever believes he will fuck up, nor that disastrous results are their direct responsibility. They always believe that the only reasons they'd be fired are political infighting or an investor/BoD revolt. Therefore, they want golden parachute clauses to protect them from such completely unjustified threats and criticism.
They're usually just separation clauses - i.e. whenever Joe Blow leaves his CEO position, he gets $X million. Like a lump-sum pension, which is more money that they don't have to call salary.
There is another aspect, sometimes a CEO is brought on in a knowingly temporary situation. Sometimes a company needs to make an "unpopular" decision, like massive layoffs or restructuring. Or they just need a CEO to come in and stir the pot. They'll bring the CEO in, they'll do their thing, and then once the deed is done, they will "decide it's best to part ways" in some form.
This sort of CEO position usually is a one and done for that person making them a less desirable candidate for employment in the future, so they get a nice golden parachute to compensate. Basically, they get paid to be the "bad guy" and are essentially selling themselves as a scapegoat for the company.
Usually because it was the result of part of the contract when they took the job. "Golden parachute if we ever fire you" is a reward for joining the company, it isn't decided when they are fired.
Another similar question: why has executive pay skyrocketed when it's exactly opposing to (most) companies best interests? Also, you could merely hire a qualified candidate from within the company who is already familiar with how things work and pay them still six figures, but not millions or billions. It seems kind of insane that one person is "worth" that much to a board.
The reason a business might not hire a CEO from within is because the CEO needs to represent the interests of the board/shareholders, not necessarily the employees or customers. An existing employee will probably have existing loyalties/disloyalties to different parts/people in the business and not be able to represent the board/shareholders in the way that they want.
Because they want CEOs to be willing to take risks to grow the company. Risks are risky, and thus a CEO who wants to keep making money from working there will be unwilling to take risks that might get them fired if they fail. Thus they ensure that the CEO will make money even if the risk fails so they will be willing to try things rather than trying nothing serious and stagnating growth.
Now, problem is, ceo tenure doesn’t tend to last very long these days, even when they do succeed, and CEOs usually get bonuses based on how well the company does under them.
Combine that with the golden parachute, it is in their interests to constantly make hail marries on explosive growth, because if they get fired for the fuck up they make as much money as if they stayed the full time they’ve got a contract for, which is probably as long as they would have stayed as at they will make more money sighting a new contract with another bigger company now that they have more experience, and if it succeeds they make bank on bonuses.
This is ignoring the long term consequences of incentivizing short term thinking and aggressive risk taking, but that’s not what management consultants care about.
Purely speculation on my part, but probably at least in part because they know enough about about the company and its secrets to cause serious trouble if they are unhappy.
Everybody in the thread so far has a pretty bitter take, and I agree that golden parachutes are a joke. But I want to offer a more neutral explanation:
Basically, for an executive at a near-CEO level, taking on a position at a new company involves a lot of risk. Companies want to hire a top executive who's willing to take a career risk without having to consider their own bottom line. A golden parachute removes personal risk.
Now, it might seem like this runs contrary to the company's own interests, but they exist to attract CEOs and other top executives. They're meant to make an offer more attractive, and any offer that doesn't include it will be less competitive.
In many cases those positions are terminal i.e. you fuck up company X and you are either never working again, or it will take you years to find a comparable position. The golden parachute is there to lower the risk for candidates when you offer the job. Is it abused? Of course it is, essentially becoming risk pay for people who aren't taking any risks. Compare to the "poison pill" where any attempted takeover or removal of executives triggers a massive payout to them.
Marissa Mayer at Yahoo was a good example of this; she was a young rockstar VP at Google and could have easily held out for the top job at a bigger / healthier company (or even Google itself), but she took Yahoo's money, failed spectacularly, and got paid $239M for, essentially, giving up her chance to ever be CEO of a big tech company again.
U.S. law allows the board of directors the control of payroll. They view themselves as superior to the servants tasked with actually accomplishing the business at hand. Imagine having to work for a living when there is golf to play, yachts to sail, and mansions to be bought. These executives set themselves up for success even in failure.
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