I’m a strong advocate for the free markets. Free markets are built on voluntary and willing win-win exchanges between individuals. I buy the hamburger from the butcher because it’s worth more to me than the $3 I give in exchange. Likewise, the butcher values my $3 more than a rotting hunk of meat. A free market is a great feedback system. Which means, if you aren’t producing anything of value, survival is going to be rough for you. But, if you produce something others do value, you’ll do fine.
Something is inhibiting that free market system when a failing CEOs is paid handsomely for destroying value. Gary Foresee, former CEO of Sprint-Nextel, resigned under pressure from the Board for his poor performance and it’s estimated that his failure will enrich him by $50+ million.
The Board of Directors that allow such things should be promptly removed by shareholders. They aren’t doing their jobs. Paying failing CEOs well has been a growing trend. Directors defend this remarkable stupidity by blaming it on the market rates for CEO. Hogwash. If you offer rich rewards for a failure, you’ll get a failure.
The problem is with the Boards. They’ve bought a faulty bill of goods from compensation consulting companies. The incentive structure is broke.
If they want to a model on how to pay their managers, they should read up on Warren Buffett, or just think how they might pay a manager of a single retail location that they might own.