Eli5: How do CEOs from failing companies bail out with golden parachutes? Where does the money come from?
In: Economics
> How do CEOs from failing companies bail out with golden parachutes? Where does the money come from?
When you work for wages, you produce a certain amount of value, which can be measured in dollars. Let us denote the value you produce as ‘x’. A small amount of that value is returned to you as wages, ‘w’. There is also the price of raw materials etc., ‘r’. We can then say that Profit ‘P’ is equal to x – (r + w).
The money comes from ‘P’, which increases as the company reduces the amount of wages, ‘w’, since ‘r’ is more difficult to reduce.
A lot of the time it’s put into a whole life insurance policy as an executive benefit. plan Attached will be a contract that basically say’s if we fire you, you get to keep the policy to take with you or cash out, but if you leave for a competitor or get caught with a dead hooker in your car, then you lose the policy.
It boils down to 1 thing. Survival of the fittest! A good CEO always knows a guy that know that, the CEO knows he has dick fingers and he’d rather give away his money than die. Basic Rege-onomics as evidence that capitalism is king and nature always finds a way.
There are some good answers here. And some are sort of relevant.
CEOs get brought in to cut costs. They start small and then they keep going until there is blowback
If there is enough blowback, they strategically resign or “get canned”. It’s all a show. CEOs are brought on to recoup costs from failing business models. They are paid fall guys.
CEOs aren’t geniuses.
They aren’t experts in the field of the company they get hired by.
They are well connected people that don’t mind being the face of hated decisions.
And they make those decisions until the analysis comes back that their work is done and it is time for the company to look like they care by moving on.
Retainer agreements, sometimes in the form of cash on completion of a bankruptcy or something.
Because even while a company is going bankrupt, it still has liabilities, it has creditors, sometimes there’s room for negotiation, sometimes there’s a Chapter 11 where the company can continue to operate, and even in the worst cases, there’s assets to sell off to recover as much value for the shareholders as possible.
At the same time, a good CEO or CFO who’s capable of doing all those things isn’t going to sign on to a failing company because it won’t shine on their career. So, they’ll have a golden parachute or golden handcuffs wherein they’ll get a bonus for doing their job well while winding down the business or laying off 80% of the employees or trying to find a Private Equity firm to sell themselves to.
If the company is still worth like 500M, it would be worth it to offer a 10M bonus for the exec team to stay until the job is finished so your equity isn’t hanging there even if the company is going down the drain. Sure it might have been worth 10B before, but 10M is cheap to save 500M
CEOs typically negotiate a contract. Employees/workers could do the same but would need to form a union to buck the status quo. The irony is everyone wants safeguards in employment but resists the bargaining power a union offers in lieu of assuming as an individual they can do better on their own.
I believe OP is mistaken in their premise. Truly failing (bankrupt) companies don’t pay departing executives big bonuses. And if they try, the bankruptcy courts routinely claws back those payments in favor of other priority obligations owed by the company. Judges don’t look kindly on pre-bankruptcy payments to departing executives and have the authority to retrieve every nickel, even for sneaky payments made a year prior.
Once the bankruptcy filing is made, retention bonuses can be put into place for certain existing or new executives who are being asked to stay through the bankruptcy process as its presumed they have knowledge of value to the remaining enterprise and can help the company successfully emerge from bankruptcy. These are called post-petition agreements.
And the bonus money comes from the limited amount of cash the company has on hand prior to bankruptcy — usually including money they “saved” by not paying some of their bills as well as other funds used for continuing operations.
It’s a racket for the workout firms who manage the filings and represent the company in the courts, but not the one most people think.
I hope this helps.
lots of good answers but more cynically, if Im a member of the board at the company you are the CEO of, and you are on the board of the company I am the CEO of, eventually everyone looks around and says “oooooh yeah we all definitely need some big compensation packages and we should get them no matter what happens”
Regarding a failing company paying a CEO, I would imagine that the promised money that is agreed upon when the CEO comes on board is set aside in an account or secured in interest bearing low risk investments so that if the company does go under the company can fulfill its contractual obligations to the CEO
I think the answers here confuse two things: the guaranteed portion of the employment contract (barring for-cause termination) and compensation in a change of control event. A “golden parachute” specifically refers to a change of control event.
In theory, an acquisition will tend to be loved by shareholders but put the executives out of a job. Again in theory, executives will have an opposing incentive to shareholders.
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