Shareholders Should Hate Golden 'Chutes

The idea of a big, fat golden parachute probably sounds great to a failed CEO. But for everyone else, it's a massive, illogical waste of shareholder capital.

The departure of BP (NYSE: BP) CEO Tony Hayward seemed inevitable in the aftermath of the Deepwater Horizon disaster. But I'll bet I wasn't alone in worrying that he'd receive a lucrative reward for his abysmally shameful leadership.

Surprisingly, in the grand scheme of things, Hayward's outgoing pay won't be too outrageous. The Corporate Library's Paul Hodgsman said in an NPR article on the topic that the usual outgoing CEO package these days averages at about $40 million.

Thanks for that, Tony
Hayward is out as BP's CEO, although he may be moved to a job at the company's Russian joint venture TNK-BP (cue the "being sent to Siberia" jokes). On his way out the door, he'll receive about $1.5 million in salary and a $17 million pension -- admittedly, not too shabby sums for us "little people."

Compared to the farewell gifts many fallen CEOs have received, Hayward's outgoing pay is mere chump change. The Corporate Library's Paul Hodgsman said in an NPR article on the topic that the usual outgoing CEO package these days averages about $40 million.

Home Depot's (NYSE: HD) Bob Nardelli enjoyed one of the most egregious goodbye gifts ever. He left the home-improvement retailer toting a $120 million payout, despite Home Depot's utter lack of operational performance for five years.

Countrywide's Angelo Mozilo may have offered to give up $37.5 million in severance pay when everything hit the skids during the subprime mortgage meltdown, but he still managed to pocket $44 million when Countrywide was purchased by Bank of America (NYSE: BAC).

Carly Fiorina wasn't exactly known for stellar stewardship of Hewlett-Packard (NYSE: HPQ); her reign included a declining stock price, massive layoffs, and an unimpressive merger with Compaq. Still, Fiorina walked away with $40 million in cash, stock, and pension benefits.

When boards go to the dogs
Shareholders should be outraged that corporate directors allow such crazy thinking to infect their employment agreements. CEOs who are underworked and overpaid are bad enough, but being compensated handsomely to leave in disgrace seems even more absurd.

As Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett once put it: "Getting fired can produce a particularly bountiful payday for a CEO. He can 'earn' more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Today, in the executive suite, the all-too-prevalent rule is nothing succeeds like failure."

Regarding the way most big companies set up compensation committees, Buffett also noted: "They don't look for Dobermans on that committee; they look for Chihuahuas. Chihuahuas that have been sedated."

Ditching the dysfunction
Shareholders need to demand that corporate boards do their jobs and stop this madness. We need Dobermans who will guard shareholder wealth, and show more bite than bark. (In addition to a few more teeth, clawbacks -- which "claw back" undeserved gains when executives foul up -- would be nice, too.)

I'm glad that Tony Hayward's path out of the BP offices isn't quite being paved with gold. Hopefully, his smaller severance is one sign that the "golden parachute" will stand exposed as a ridiculous reward for failure. Paying out tens of millions in shareholder capital for lousy leadership is a symptom of a dysfunctional marketplace. Only honorable, effective corporate leadership deserves lucrative rewards. Foolish investors should dare to dream of a more logical future.