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Severing Risk And Reward

Mark Cuban had a good post on his blog regarding the financial sector meltdown and what to do about it:

If the government must step in and provide any sort of financing or guarantees for any part of a public company’s business, then all officers and directors lose all rights to severance pay and all outstanding vested or unvested options or warrants immediately become canceled. In the event the CEO of such corporation is not fired, but instead chooses to step down voluntarily, then the last 12 months of earnings is considered to be an interest free loan which the CEO must pay back over no more than a 10 year period.

Honestly, i dont think it would have changed the actions of CEOs who have been bailed out. They would have thought it “couldnt happen to them”. But once it happened a couple of times to a couple of big company CEOs, it would be in the decision making process of every CEO running a huge financial company.

Making it harder for executives to walk away with huge sums of money after deep-sixing their companies into the ground and fucking over the taxpayers who ultimately get stuck with the bill will mean they’ll be extra careful about taking absurd risks and ignoring market constraints (i.e. subprime loans). Properly incentivized CEOs will still take risks, but they’ll do it within the bounds of reality. It’s time for a return to the fundamentals — 20% down payment on big ticket items like houses.

Some would argue that turning CEO golden parachutes into lead zeppelins would restrict the market for available and talented CEOs. I agree with Mark Cuban that this is ridiculous. Potential CEOs don’t get into the business of running companies primarily for the money; they do it for the power.


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