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Eh, even keeping the mechanism of limited-liability-corporations around, some would say boards aren't representing shareholders' interests effectively. It's on

Eh, even keeping the mechanism of limited-liability-corporations around, some would say boards aren't representing shareholders' interests effectively. It's one thing for shareholders to say if under the CEO's leadership, the company's value rises by 100 million dollars, they'll give him a $10 million bonus. I can see how a board could approve that - it's a lot of money, but it's linked to performance. But should they also say that if the company's value falls by 100 million dollars, and they decide to fire the CEO, they'll give him a $2 million bonus? How is it in shareholders' interests to reward bad performance?

tmoertel 2y ago
One reason that CEOs get good severance packages is to entice them to leave other successful companies. If they are doing well at those other companies, are well liked by the board, and can reasonably expect to make a lot of money, why should they leave that safe, lucrative situation to come to your company, where there's a higher risk of failure or of falling out with the board? Enter the severance package. It guarantees the incoming execs a minimum payout that's large enough to entice them to give up what they'd expect to safely earn by staying where they are.
- michaelt 2y ago
  That's a great explanation for signing bonuses. Doesn't do much to explain severance packages though? Unless the board wants to give a signing bonus, but the amount is so egregious the shareholders would riot, so they need to do it by stealth.
  - pluc 2y ago
    Severance packages are usually negotiated from a position of power. You want me? Great, I'd like a 2M golden parachute. If everyone they interview agrees to play the same game (and they do), it becomes a "necessity to attract top talent".
  - tmoertel 2y ago
    Yes, if you're an executive being lured away from your current position, both signing bonuses and severance packages will serve as insurance against your new position not working out. But, if you're on the board that's trying to lure an executive away, you should prefer severance packages to offer this insurance because you don't have to pay out until the relationship falls apart, and if you've chosen your new executive well, the relationship won't fall apart.
nradov 2y ago
Boards will sometimes write a severance package into a CEO's contract with an eye towards a possible future sale. When the company is acquired, the CEO will most likely lose their job. The Board thus wants to ensure that the CEO doesn't have a financial incentive to block a sale. A good severance package can increase shareholder value. (This is just a comment about severance packages in general, I have no idea what happened at Sonos.)

tmoertel 2y ago

One reason that CEOs get good severance packages is to entice them to leave other successful companies. If they are doing well at those other companies, are well liked by the board, and can reasonably expect to make a lot of money, why should they leave that safe, lucrative situation to come to your company, where there's a higher risk of failure or of falling out with the board? Enter the severance package. It guarantees the incoming execs a minimum payout that's large enough to entice them to give up what they'd expect to safely earn by staying where they are.

michaelt 2y ago
That's a great explanation for signing bonuses. Doesn't do much to explain severance packages though? Unless the board wants to give a signing bonus, but the amount is so egregious the shareholders would riot, so they need to do it by stealth.
- pluc 2y ago
  Severance packages are usually negotiated from a position of power. You want me? Great, I'd like a 2M golden parachute. If everyone they interview agrees to play the same game (and they do), it becomes a "necessity to attract top talent".
- tmoertel 2y ago
  Yes, if you're an executive being lured away from your current position, both signing bonuses and severance packages will serve as insurance against your new position not working out. But, if you're on the board that's trying to lure an executive away, you should prefer severance packages to offer this insurance because you don't have to pay out until the relationship falls apart, and if you've chosen your new executive well, the relationship won't fall apart.

nradov 2y ago

Boards will sometimes write a severance package into a CEO's contract with an eye towards a possible future sale. When the company is acquired, the CEO will most likely lose their job. The Board thus wants to ensure that the CEO doesn't have a financial incentive to block a sale. A good severance package can increase shareholder value. (This is just a comment about severance packages in general, I have no idea what happened at Sonos.)