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Bring On the Leaden Parachutes

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Ancient alchemists tried to turn lead into gold. I've got an idea for a new, 21st century form of alchemy: Let's try turning golden parachutes into leaden parachutes. "Golden parachutes" are too often an illogical policy in normal times -- for example, when executives who run companies into the ground receive giant outgoing pay packages. It's now made worse when currently beleaguered companies are seeking government help and somehow think such paydays should still apply.

A lot of somebodies didn't get the memo
Many companies applying for government funds have seemed strangely oblivious of their own supposedly dire plights and still plan bonuses and raises for their executives, not to mention dividend payments and acquisitions. Talk about entitled attitudes (made quite clear from sick bits from recent congressional hearings).

Remember all the outrage at the idea that CEOs at Fannie Mae (NYSE: FNM  ) , Freddie Mac, and AIG (NYSE: AIG  ) might wiggle out of their companies' wreckages with massive golden parachutes? Apparently the sound of fury fell on many deaf ears -- although I was glad to see a Wall Street Journal article that said securities firms are mulling cutting executives' pay due to public outrage. But many individuals at affected corporations haven't seemed to "get it."

After all, more and more companies are getting off the beaten path despite the promise of emergency help from the government and the U.S. Treasury's Troubled Asset Relief Program (TARP). Is it like bad kids trying to see just how much they can get away with?

For example, Bank of America (NYSE: BAC  ) may have cut its dividend, but it still pays one, despite the fact that it's on the TARP list. PNC Financial Services Group (NYSE: PNC  ) announced its acquisition of National City after it received $7.7 billion in government funds. Or how about The South Financial Group's (Nasdaq: TSFG  ) CEO recently announcing his retirement -- with a $12 million payout reportedly pending -- just days after the company said it was going to apply for TARP funding?

What reluctant support there was for bailout money for financial firms (mostly from politicians, as it was tremendously unpopular with many of us little people) was based on allegations that our economy would grind to a halt if these companies weren't propped up. So how is it that these companies appear to be all business as usual, throwing money into the wind, as if nothing has gone amiss at all?

Onto the golden parachutes
Speaking of throwing money into the wind, that's a golden parachute for ya. Furthermore, in the current situation, I can't fathom the argument that public money can or should be used to make good on millions, even billions, of dollars in contractual goodbye payouts to executives departing from companies whose engines just stalled and are in a nosedive.

I'm a proponent of the free market -- it's harsh but free and fair -- but these days many corporations make it clear that they're about "management culture" far more than free-market principles. They're looking out for themselves and their top brass at the expense of shareholders, employees, and now taxpayers, regardless of performance.

That's not a free market, it's a rigged con game, and shareholders, employees, and taxpayers are the losers. And I fear the government intervention is going to make it an even more absurd rigged con game as Uncle Sam in effect rewards and enables bad behavior, maybe even picks winners and losers, and then lets them take advantage of public funds in various ways.

I have no problem with lucrative compensation for stellar performance, but the concept that certain "important" people should be grandiosely paid no matter what transpires under their watch has got to go.

The end of the era of entitlement
I can only hope that despite all that's utterly rotten about our current financial situation, some good things will result. I'd like to see "investors" ditch the speculative pursuit of short-term wealth and remember long-term investing requires seeking out solid, well-run companies and -- gasp! -- being patient. And hey, if they realize their companies are run by overly compensated crooks or mediocre do-nothings, shareholders should either try a little shareholder activism or bail like the house is on fire, because one day, it probably will be.

Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett has often spoken out about the dangers and illogic of runaway CEO compensation, including pay for failure, and it's high time we all listened, and cared about this issue far more than we have.

Let's embrace being true shareholders and remember part-ownership also means being fully informed and standing up for good corporate governance principles like "say-on-pay" policies and keeping an eye on whether boards are looking out for shareholders', not management's, interests. Outrageous golden parachutes being given out even in the event of flaming failure should become a thing of the past.

The sense of entitlement -- and refusal to take responsibility -- that seems pervasive in the management cultures at many public companies simply has to go. It's not what made our country great, and it has nothing whatsoever to do with a free-market economy, which allows successful ideas to flourish and renders failed ideas obsolete. So bring on the leaden parachutes!

Here's some related ranty Foolishness:

Bank of America is a Motley Fool Income Investor recommendation. Berkshire Hathaway is a Motley Fool Inside Value and Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On October 31, 2008, at 11:34 PM, prginww wrote:

    Comparing CEO compensation and dividends with the acquisition of a bank in a critical geographical area on the verge of failure is like comparing apples not with another fruit, but with a basketball. PNC should be applauded for taking on the risks and the problems instead of being criticized and compared to the obvious abuses.

  • Report this Comment On November 01, 2008, at 12:03 AM, prginww wrote:

    Alyce, I'm so glad to see that some one has a logical argument against paying executives lots of money for poor performance. I think the government should've been much more selective about which companies they "helped" and I think they should've set a lot of rules and conditions on the "help". After all it's not "their" money it's "our" money. I think a lot of executives act like spoiled bratty kids who think they can do whatever they want. A lot of boardmembers act like bad parents who are too busy or too blind to see that there kids don't deserve what they're getting. In my opinion Uncle Sam acted like a bad parent when they decided to bail out those companies. I believe in tough love. I would've let them fail. If that caused a second great depression, so be it, it would've been a good lesson for the world's dumbest uncle, and for America's greedy executives.

  • Report this Comment On November 01, 2008, at 12:13 AM, prginww wrote:

    Hey Eagles20! If PNC needed a loan of $7.7 billion they have no business acquiring another company! You do acquisitions when you're company is sailing on smooth waters not when the ship is in danger of sinking! Why would they want National City anyway?! Just because the share price is cheap?! That doesn't make it a good investment! The only thing PNC should be applauded for is a boneheaded acquisition!

  • Report this Comment On November 01, 2008, at 1:27 AM, prginww wrote:

    The system in place now rewards management for bad behaviour. Senior managers of financial institutions circumvented both regulation and ethical behaviour. Greenspan opposed regulation on the grounds that big clever financial institutions would never take actions that would lead to the demise of the institution.

    He was wrong but he is confused as to why.

    I submit that senior management recognized that they would be more rewarded for short term risky activity than for long term prudent activity.

    Everybody in the financial world knows leverage is dangerous. Unprecedented levels of leverage in the recent past accomplished two things. First: senior management of major financial institutions made fantastic amounts of money in a very short time. Second: the same leverage inevitably led to collapse of the institution.

    It is easy to argue that senior managements' best interests were to make a lot of money in the short term. The long term health of the institution is of little consequence if you can corrupt it such that it generates fantastic personal wealth in a short time.

    Regulation is required to ensure that senior managements' best interest is in the health and prosperity of the institution.

    Derivatives like synthetic CDO's and credit default swaps were invented specifically to circumvent regulations preventing financial institutions engaging in overly risky behaviour. These derivatives need to be heavily regulated. I find it hard to believe that they will be given that the BIS's 2004 Basel II accords haven't been implemented by signatory countries yet.

    The last recourse open to investors is a revolt. Create a set of rules regarding remuneration that senior managers of financial institutions should adhere to and keep track of those that do. Publicize the list and let investors vote with their dollars.

    Just say no to overpaid management.

  • Report this Comment On November 01, 2008, at 11:58 PM, prginww wrote:

    Looks like the "reverse Robin Hood effect" will continue this Christmas. Goldman Sachs and the other usual suspects plan to use billions of taxpayer (bailout) dollars to pay bonuses to top executives in 2008.

    See Daily Mail and Bloomberg articles:

  • Report this Comment On November 02, 2008, at 11:34 PM, prginww wrote:

    Responding to Eagles20

    Although the principal of one "strong bank" buying another with Government bailout money may seem plausible in some situations to some people, this particular combo is bad.

    This action does save the FDIC some funds, and it certainly saves some professional butts of regulators asleep at the switch.

    However, this is very bad for Pittsburgh and all of western Pennsylvania, as well as many cities through Ohio, Indiana, Kentucky where there is a strong market overlap between the two banks.

    As a resident in the Pittsburgh area, I can foresee many branch closings, which means lost employment (at least temporarily) for many folks. This will also put a dent in competition in this area, because of the PNC dominance. HOW WILL THAT IMPROVE THE LENDING ENVIRONMENT WITH SUCH DOMINANCE??

    Increased lending is the goal of the government program ! and I can not see that result here!

    It will take many of you out of town banks to come into these markets and buy these shuttered branches, then maybe, eventually, competition, and lending will be restored.

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