Whoever Designed Ray Mozilo’s Severance Package Should Be Ashamed
Posted on Saturday, January 12, 2008 by Frank RocheWhen I’m Wrong, I Say I’m Wrong…Unless I Design Crappy Severance Agreements
There’s a scene in Dirty Dancing when Dr. Houseman says to Johnny Castle, “When I’m wrong, I say I’m wrong.” Too bad that doesn’t happen when exec comp goes haywire.
Severance Packages Gone Wild
In an ugly scene from Severance Packages Gone Wild, we see Countrywide Financial’s CEO getting $110 million as he leaves the company. The rub? Under Ray Mozilo’s “leadership” in the past year, Countrywide’s stock declined 81 percent and they laid off 10,000 employees. Yep, he ran the company into the ground by encouraging subprime lending, then he gets paid off.
Sorry, but I’m pissed about this. And you should be too. There are good people out there who design fair and competitive executive compensation packages. This ain’t one of them.
Have You No Sense of Decency, Sir?
Whoever designed Ray Mozilo’s $110 million severance package should be ashamed. So ashamed, in fact, that they shouldn’t work in the HR business anymore. It gives us all a bad name. I mean, c’mon.
Here’s some background from a Los Angeles Times article today:
[SNIP...] Mozilo was guaranteed three times his base salary, plus a cash payment equal to three times the greater of his average bonus or the incentive bonus paid the previous year. Net value: $87.8 million.
Read the whole article. Eat something bland before you do because you’re gonna throw up in your mouth.
Circuit Breakers for Severance Packages
I’m not a comp designer. But I know a little bit about it. Here’s a solution: Severance packages shouldn’t encourage bad behavior. They shouldn’t reward pulling forward on sales the year before a CEO leaves. And if a company has been run into the ground, there should be a severance circuit breaker. No performance, no severance. It’s as simple as that.
Just for Laughs
If you’re a little fragged off about granting severance to a guy who ran a company into the ground, or even if you’re just feeling a tinge of schadenfreude, this one’s for you. On the Countrywide Financial investor’s page, right next to the one-year stock graph showing a price decline from $45.26 to a low of $4.43, is a link to a speech that Ray Mozilo gave which extols the “virtues” of sub-prime lending. The title of his speech? The American Dream of Home Ownership: From Cliche to Mission.
I got another one for ya, Ray. Your next speech could be From Layoff to Payoff: How I Learned to Stop Worrying About Sound Business Practices and Learned to Love My Severance Package.
Jim Stroup
Jan 12th, 2008
Frank,
I completely share your frustration, inflamed all the more by the hypocrisy – expressed in both words and deeds – by perpetrators such as these. To me, extraordinary examples like this one are only the visible evidence of a deeper problem arising from the fundamental misalignment of manager/owner interests, exacerbated by the failure of boards to do their fiduciary duty.
Thanks for such an effective presentation of this problem!
robert edward cenek
Jan 13th, 2008
Countrywide’s Board of Directors clearly share some culpability here. In a larger sense our society needs to share the blame. Another example of the unbridled greed that has exploded throughout our country – and in epidemic proportions over the past 15 years. How sad….
robert edward cenek
Cenek Report
Frank Roche
Jan 13th, 2008
Jim and Robert, I agree, the Board is supposed to have a fiduciary responsibility. I think they flubbed this one.
JT
Jan 13th, 2008
OK. Say this with me – JT is not supporting the Mozilo severance package. Thanks – now keep reading.
The problem is not the severance package.
Too many criticisms of these severance packages that pay out after a business, social and human disaster imply that the package was calibrated at the time of the disaster. They aren’t. The severance package was assembled at the point of his last employment contract on 22 Dec 2006.
The promises that resulted in these numbers were made then. At that time, among other things, Mozilo had been chosen for three years running by Barrons as one of the 30 best CEOs in America. He had been running Countrywide since he founded the place in 1969!
Why were the promises made? Because the Board and the shareholders thought Mozilo was going to continue to make them rich and they were willing to promise him a free ride on the assumtion that he was going to keep doing so.
Board are to blame for these bad deals. But so are shareholders. Shareholders and their boards who want and get and unexaminedly accept outsided returns should not be surprised when the performance and karma regress to the mean.
When we fall in love with our CEOs to the point that we are willing to offer no-fail contracts. When we are unwilling to require long-term performance and risk management checks on our short term gains – then we can all do what is needed to avoid things like the Mozilo severance.
We need to look in the mirror next time we gloat that we are congratulating ourselves for making a quick buck on the next easy money stock.
Go back and read the first line of this post.
Frank Roche
Jan 13th, 2008
JT, you’re right, it’s the Board. And it’s the pressure to day trade a stock while talking about “investing for the long term.”
Thanks for expanding this discussion. I think it’s important…and it makes me blow a gasket when I see companies run into the ground. I don’t begrudge CEO pay or severance agreements when they’re based on sound business…I hate them when they’re based on corporate greed.
HR Wench
Jan 13th, 2008
Excellent post my dear Frank. And excellent points from the commenters above.
My take: subprime = slime. I hope they ALL rot.
robert edward cenek
Jan 14th, 2008
JT…I think that real issue is that our society needs to move away from the myth of the heroic CEO.
For every Steve Jobs there are 15 Carly Fiorini’s — 2 Ken Lays —- and 1 Jack Welch wannabe.
robert edward cenek
Cenek Report
http://www.cenekreport.com
Frank Roche
Jan 14th, 2008
Robert, I’m gonna quote you on that. Cool twist of a phrase…For every Steve Jobs….well done.
WR Wench, thanks. I was really steaming and it’s the words that spewed out. That whole subprime thing frags me off. And I hate to see people get rich while others’ lives are ruined.
Productivity Guy
Jan 14th, 2008
Good comments all around. I also take issue that these severances are basically treated like bonuses, only are not tied to performance in any way. The “commenters” make a point that severance is often decided before a failure, but doesn’t that mean the system of calculating severances are flawed?
JT
Jan 14th, 2008
Agree that the design is flawed – just the time to complain is when the deal is made, not when it’s paid. Agree also with Cenek on the folly of the heroic CEO. I think that Boards decide to go that route because they are too lazy to demand that a full team and model be developed. It’s easier to hire one person and bet the ranch.
ubermench
Jan 14th, 2008
JT’s explaination is spot on in terms of the way things are now. I dream of a world where accountability and creativity come together to significantly reduce awards when CEOs sell their companies or get fired because they fail.
If they get alot while they are successful they should get little when they don’t. Few boards are willing to buck current practice or the will of a successful CEO to put in some fail safe plans.
It is not just that the average person fails to understand how things work in a big corporation, it is that big corporations do not yet understand that investors will not put up with the outrageous forever.
(You should be hearing thunder rolling in the background.)
robert edward cenek
Jan 14th, 2008
Some good comments, but the reality is that the small investor can not influence the design of executive compensation packages. I think that unfortunately this is an “institutional problem” that requires an institutional solution. Up to this point however, our electorate has seemed content to elect office holders who don’t wish to take on this issue.
Pinky Bear
Jan 16th, 2008
The whole Severance package thing is a bone to corporate lawyers who are fearful of their own shadows.