Most boards of directors approve of such deals for disgraced CEOs on their way out, because they are usually honoring what was negotiated at the beginning prior to the CEO taking the job. It's no different from a baseball player making 25 million a year to fail 8 out 10 times on average and hit 15 homeruns out of nearly 700 plate appearances. A deal is a deal, and when it comes to CEO's such agreements are negotiated to promote CEO actions that are in the best interest of the firm and to recruit executives who are most capable of achieving desired results. Poor corporate governance may play a role in the granting of some dubious severance packages. However, as pay-disclosure rules mandated by the SEC have become stricter and the public has become more aware of the extent of executive compensation, corporate boards have begun to offer less extravagant pay packages. Within ...view middle of the document...
Rather, the research supports three motivations behind executive severance agreements: to encourage risk-taking, to provide job insurance, and to compensate CEOs in the instance of confidentiality requirements. While the question of whether or not CEO severance packages are excessive will certainly remain controversial, it is clear that the existence of substantial CEO severance packages has a theoretical foundation. I'm not really sure if this practice is best for the company. However, I do think there are two main areas a severance package even if of obscene proportions are paid out to undeserving CEO's on their way out.
1) FINANCIAL HEALTH OF THE COMPANY – There is no hard and fast rule here. Sometimes the largest and healthiest companies are the most stingy – (that is why they are rich). Some smaller and less profitable companies, on the other hand, will provide very generous severance packages. However, large and established companies tend to provide better severance packages.
2). LEVERAGE - The key to obtaining an excellent severance package is leverage. If the executive has strong contacts or relationships that are valuable to the company, the company may offer a large severance package to preserve a strong relationship with the executive. Also, if the executive has information that is valuable to the company or which could be harmful if released to the public, the company will pay a premium for confidentiality. Finally, if the company discriminated against the executive or otherwise violated their rights, the company may enhance the severance package to avoid litigation. I think the two quotes below fit best when discussing greedy CEO's who laugh to the bank collecting their undeserving severance packages while the hard working men and woman on the floor weep to the unemployment line. Madoff, the second one is for you!
Lk. 12:15 - "be on guard against every form of greed; life is not in possessions"
Prov. 11:6 - "the treacherous are caught by their own greed"