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CEO Severance Pay: Why Losers Often Win Big


Rewarding incompetence, missteps and blunders.

Sometimes huge mistakes pay off. In 1492, Christopher Columbus's cartographical miscalculations led to his discovery of the New World. In 1928, Scottish biologist Alexander Fleming inadvertently discovered penicillin by accidentally killing a bacterial culture he was working on in his lab.

And in 2008, Martin J. Sullivan, the CEO of AIG (AIG), mistakenly steered his company through 2 quarters of record losses, but was buoyed by the news that his imminent departure would earn him another $47 million.

Okay, scientific serendipity and CEO severance pay may not be exactly the same thing, but there is a common thread: Sometimes losers can win big. In the cases of Columbus and Fleming, you might argue that they just got lucky. But for CEOs like Sullivan, there are actual reasons -- economic ones -- why their incompetence is rewarded.

But first, a word from the naysayers - and there are many quick to condemn the outlandish sums of money paid to defrocked CEOs. Who can blame them? After the government's bailout of Fannie Mae (FNM), CEO Dan Mudd stood to gain $9.3 million in severance pay. Freddie Mac's (FRE) Richard Syron was on his way to a cool $14.1 million. The public backlash was immediate.

"It's a stretch to make a case that either CEO deserves a severance payment," said Amy Borrus, deputy director at the Council of Institutional Investors, on Marketwatch. "Investors are taking huge hits from the losses."

Mudd and Syron are just the latest in a long line of CEOs whose poor performance set the stage for massive personal gains. But they would hardly have been the largest benefactors: Robert Nardelli, former CEO of Home Depot (HD), received a whopping $210 million in severance pay. Disney's (DIS) Michael Ovitz received $140 million. Hewlett-Packard' (HPQ) Carly Fiorina received $21 million.

If only professional failure were rewarded so handsomely across the board. Hell, couldn't we all go home?

Not exactly. According to one study from Northwestern University 's Kellogg School of Management, there's a big, big difference between your job and that of a chief executive - one that means CEOs deserve every severance penny they get.
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