Should failed executives clean up on the way out?

In an economy buffeted by war, outsourcing and the rising cost of basics like food and housing, many corporate executives remain removed from such cares and worries. As cost-cutting hits the factory floor and the back offices, costs in the executive suites continue to soar. And when failed CEOs like HP's Carly Fiorina walk away with tens of millions in severance pay, the public –- as well as shareholders –- begin to ask the hard questions.

You've failed. You're fired. Here's $21 million.

That is the common public impression of Carly Fiorina's forced resignation Feb. 9 as CEO of the Hewlett-Packard Co. after six years at the helm of the Palo Alto, California-based high-tech corporation.

The $21.1 million severance package awarded to Fiorina, the first woman to serve as CEO, chairman and president of a major computer company, renewed curiosity about — and criticism of — rising executive compensation and the growing practice of "golden parachute" payments to executives who are being shown the door.

Analysts wonder if failure, misplaced priorities and questionable mergers are being rewarded.

A Fiorina-led push to acquire Compaq Computer Corp. had narrowly succeeded in 2002 after a bruising infight with merger opponents including HP executives, directors, shareholders and Walter Packard (son of late HP co-founder David Packard).

The $24.2 billion acquisition, though a political triumph for Fiorina, was less successful as a business move: the bigger corporation struggled in a competitive computer technology and services market, and HP's stock value decreased by about two-thirds from 2000 to 2005. HP stock rebounded in the short term after the announcement of Fiorina's departure.

"Maybe the golden parachute was worth it to get rid of her," said W. P. Carey School of Business management professor Robert E. Hoskisson. "My guess is the cost of the golden parachute looks paltry. Did they get the best person and protect the shareholders as best they could?"

Hoskisson said the Compaq deal may have been a misstep, but is the kind of risk that governance packages and executive compensation encourages managers to take. Higher CEO pay and golden parachutes are meant to balance risk-bearing with prudence.

"Risk-taking is necessary to produce higher returns and thus the pay system should encourage CEOs to take necessary risks without being afraid of the downside," said W. P. Carey management professor Luis Gomez-Mejia. "But then there is the opposite side of these arguments. One is that executives often become entrenched and can protect themselves from harm while all other employees pay the price for their decisions. There is also the distributive justice argument that payments of such magnitude are unjustifiable and inequitable, particularly when there is the appearance of rewarding failure. My guess is that most people feel that 21-plus million dollars is excessive, reinforcing the notion that CEO pay is out of control."

Fiorina's severance package was prearranged and commonplace, according to W. P. Carey management professor Albert Cannella. "What we have here is an employment contract, not a golden parachute," Cannella said. "The $21 million was to settle accounts with her. She had an employment contract, and $14 million of the $21 million was 2.5 years' salary and expected bonus – the contract specified this proportion precisely. This isn't at all unusual or out of the ordinary, though I would not argue that it isn't excessive."

Such detailed severance packages head off disputes by spelling out the terms of the contract, Cannella and Gomez-Mejia said.

Faireconomy.org, in its 11th annual executive compensation survey, "Executive Excess 2004," reported that the surge in executive compensation is accelerating at top corporations – and that firms led by the highest-paid CEOs were most likely to export jobs, to be heavily involved in political fund-raising, and to lobby against treating as expenses the stock options that are given to executives. Fiorina, formerly with Lucent Technologies, has been an advocate of outsourcing.

"The job of a CEO is to maximize shareholder wealth," Cannella said. "They [shareholders] would stand up and applaud the exporting of jobs overseas if it increased their wealth, and my strong suspicion is that it does increase their wealth...They are nameless and faceless, and they will dump their shares in a second if they think it will make them a profit."

But at least Hewlett-Packard is making a profit; CEO compensation is especially controversial when a company is struggling. A prime example is USAirways, which has been fighting off bankruptcy since the Sept. 11 attacks in 2001 sent the airline industry into a nosedive.

USAirways has taken has taken flak for the multimillion-dollar payments given to departing corporate managers. CEO David Siegel received a $4.5 million severance payment when he resigned in April 2004. In an attempt to stanch its flow of red ink, USAirways has slashed its employees' salaries about 21 percent and dumped its under-funded retirement plans on the government, which means current employees most likely will receive pennies on the dollar of the pensions they once expected.

Is such executive performance worth millions?

"I think executives are overpaid," Hoskisson said. "I believe managers have more control over corporate governance than they should. There's a lot of hubris."

According to Cannella, "There is plenty of CEO talent out there and the salaries we're observing are not at all necessary to keeping executives in the company. However, if one company slashes its CEO's salary, that CEO will likely jump to another company." Cannella said the problem of inflated egos –- and compensation –- is systemic: "Is this any worse than the dot-com nerds who made millions from foolish investors in the 1990s?

There are exceptions to the rule of ego and hubris among U.S. CEOs. Cisco Systems' John Chambers took a salary of $1 a year in 2002 and 2003, when the company laid off 8,500 employees. Costco's James Sinegal has said his comparatively small salary of $350,000 is plenty for him. Although both CEOs also hold millions in stock options, their humility and modesty engenders respect and loyalty among employees and shareholders.

"That kind of person, if you could get that institutionalized,'" Hoskisson said, "would make for a much more trusting marketplace and a much more trusting public."

What can stockholders concerned about excessive CEO compensation do to discourage it?

"I think it is going to take concerned action on the part of shareholders, probably led by large institutional investors," Cannella said. "I don't see that happening –- but it might. Another sad truth is that these companies are very large, and the dollars involved don't seem so large in the context of the sales of the companies. Further, legislation would probably do more harm than good."