Discuss the concept of granting “Golden parachutes to executives”. Explain how this practice could be in line with shareholders’ best interests. Do you see how this practice could possibly be taken advantage of by the executives?
Upon employment, senior executives are entitled to a certain payment either in monetary value, or in equity should their contract be terminated ‘without cause’ before the end of their contractual tenure. This payment is normally referred to as a “Golden Parachute.” Golden parachutes have often raised concerns of abuse and claims that the management elite of the company could be taking advantage of the company (Nourayi, 2008).
A case in point is the 2008/09 economic slump, its saw the bailout of several financial institutions by the government that ensued the unraveling of a deep-lying phenomenon in the corporate management foray, severance payment. The figures put up for compensation in favor of senior executives were staggering and shareholders were left to wonder as to the ethics of the whole concept of the matter. These reasons are meant to satisfy the strategic missions and visions of the organization, and goals such as profitability and sustainability. This is normally for a specified post- contract period.
The practice of offering golden parachutes is of importance to companies for several reasons. Foremost, they are issued to ensure that the executives give their best performance. This is because the executive is not entitled to severance packages should they breach any contractual terms. Severance payments come to play if the termination of the contract is ‘without cause.’ As such, executives will strive to perform exemplarily at their work place. These packages serve to hold off terminated executives from offering service or consultancy to the company’s competition upon termination (George& Allan, 2006).
I see the possibility that executives could create and orchestrate calculated moves to take advantage of these severance packages. This could be possible through the manipulation of their terms to end before the period stipulated on the contractual terms. Other avenues may also be crafted; the bottom-line is that this is possible.
Do you think that Grasso’s compensation was excessive and feel that a portion of the compensation should be repaid?
Grasso’s compensation package was indeed excessive and a proportion of the amount required to be paid to him as deferred payments. Therefore, a portion of the package should be repaid as it was excessive and its implementation inappropriate. The events surrounding the compensation package were highly questionable. It is believed that the compensation package was made in an accurately orchestrated scenario. Immediately after the issuance of the compensation, a package the board of the NYSE met and approved the same (Dealbook, 2007).
It is clear that the board did not critically scrutinize the compensation packages for both legibility and accuracy. The compensation committee’s change of leadership in close succession and rhythm with Grasso’s resignation attracts questions. The reason for this is that the compensation committee had been working under Grasso prior to his resignation and was subject to bias. What is more shocking is the way the new chairperson of the compensation committee consented to the compensation package without much scrutiny. It is thought that there could have been undue influence applied to the case (George& Allan, 2006).
Who is hurt by excessive compensation and are there other parties that gain from the excessive compensation?
The shareholders are the ones who endure the most of heavy compensation packages and overstated severance packages. It affects the profitability of a company as it takes away hard-earned and highly deserved incomes. Other parties that could benefit from excessive compensation are those who facilitate the accent of the same. Dealings may be involved in order to realize such payments; the dealers herein are the beneficiaries (George & Allan, 2006).
Why did the board approve the pay and the courts rule that Grasso could keep his pay?
The board may have approved the package out of corrupt dealings or out of the need for fulfillment of the basic reasons for severance packages, to protect the company’s confidential information. Upon detection of inconsistencies and some irregularities in the approval of the compensation package, the courts ruled against it.
Dealbook. (December, 5, 2007.). Who's to Blame for Big Golden Parachutes? - NYTimes.com. Mergers, Acquisitions, Venture Capital, Hedge Funds - DealBook - NYTimes.com. Retrieved July 8, 2012, from http://dealbook.nytimes.com/2007/12/05/whos-to-blame-for-big-golden-parachutes/
Gasparino, C. (2007). King of the club: Richard Grasso and the survival of the New York Stock Exchange. New York: Collins.
George, R. K., & Alan, E. S. (January 01, 2006). The conflicting roles of the new New York Stock Exchange. Journal of Investment Compliance, 7, 3, 51-66.
Nourayi, M. M. (2008). Executive Compensation. Bradford: Emerald Group Pub.