Most companies in the corporate business world award their CEO’s with severances which do raise an eyebrow to many people; there are a number of reason why board members normally approve such severances despite being seen as a loss for the company and a pay to a disgraced individual leaving the company:; the main three reasons for such course of action include: Encourage risk taking, Provide insurance for the incoming CEO and Compensate the CEO for entering into confidentiality agreements.
CEO severance pay acts as an incentive for rick-taking when it accompanies Executive Stock Option (ESO) packages; this is because a stock’s volatility increases due to a CEO’s risk taking which in turn increases the company’s ESOs and severances. The severance pay increases when the company’s stock is likely to fall leading to the loss of position by the CEO from the company. If the severances were not in place, CEO’s would evade risky project for the fear excessive stock volatility; so severances make the CEO’s ambitious for their wealth and at the same time accept risky and ambitious projects for the company.
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The stock returns are volatile and as such, severances act as protection for the incoming CEO’s; the severances will enable the new CEO’s to work without much worry of their job position and failures that they may incur in the company; also for the young CEO’s they are assured of a good job serving time in the company before they are laid off. If the CEO for example in the case study; had left the company in poor performance, the severances will enable the new CEO’s to worry less of being fired like the predecessor and commit to upgrading the company.
Lastly, severances also act as compensation for the CEO’s entry into confidentiality agreements with the company; firms will always want to compensate the CEO’s in exchange for their own future security through insisting on confidentiality. Severances packages despite being huge are always for the good of the firm or the organization.
