A Reflection On Sun Executive Payouts For Failure

With the Oracle/Sun merger finally completing at the end of January, one former Sun worker has taken the time to reflect a bit on the extravagant compensation and golden parachutes that the former executives at Sun are receiving for failing at their jobs. "I think it's fair to say that, for all the miscues that eventually led to its demise, the company created many products and technologies of value along the way, enough so that Oracle thought it was worth it to acquire them and try to keep them going. However, I think that it's equally fair to conclude that, after years of running losses, including about $2 billion in fiscal 2009, so that a buyout was necessary to avoid looming bankruptcy, Sun's executives did nothing to deserve lavish rewards, by any conceivable meaning of the word 'deserve.' But what actually happened is by now a familiar story. [...] And here's a prediction that I feel quite certain of: if, against expectations and my hopes, Ellison drops the ball and things start going south for Oracle, it's the employees who will suffer for it, and he'll be doing just fine."

Comments

Easy Solution

[cohensh]

If only they would have gone on Undercover Boss. All would have been solved.

To quote Mel: "Its good to be the King"

[Fallen Kell]

As almost always in big business, those in control will make sure that their personal interests are met, even at the expense of the company as a whole. It is more important that the board makes sure they all get several million payout should the company fall apart.

Re:To quote Mel: "Its good to be the King"

[eln]

While there's no doubt golden parachutes in contracts are often excessive, in this case (from a quick scan of the article), the bulk of the compensation these guys received are from the buyout of the stock. They owned lots of stock (due to stock grants and options from the company, most likely), and so they get a big payout when Oracle buys all of that stock. Yes, they got a straight cash parachute too, but the bulk seems to be from stock.

So, isn't the fact that they owned a lot of stock in the company, and thus their personal fortunes were tied directly to the company's performance, a good thing? We can argue all day as to whether or not their compensation in general was excessive (and it probably was), but it seems to me the fact that most of their golden parachute was due to the buyout of stock they already owned is a good thing.

Re:To quote Mel: "Its good to be the King"

[jeffmeden]

Because when it's their *job* to look out for the interests of the employees and stockholders, and they instead look out for only their own interests, it becomes something completely different from self-preservation, motivation, or whatever you want to call it. It becomes greed. It is arguably theft. It is almost certainly evil. It is in no way, shape, or form a 'job well done'.

Re:To quote Mel: "Its good to be the King"

[FooAtWFU]

This is what the economists call the "principal-agent" problem. The principal (shareholders) hire a bunch of people to do things in their best interests (get the company to make money and give that money to the principals) but the agents (CEOs, and his own agents) are "looking out for their own interests" and just set things up so they get rich one way or another.

It's "evil and wrong when somebody else does it" in this case because they're supposedly being paid to do better. It's "normal and acceptable" to some extent when you do it, because you're usually doing it with your own life and your own resources, unless you aren't, in which case that's just hypocrisy, which is nothing new in the world one way or another....

Re:To quote Mel: "Its good to be the King"

[Chris Burke]

Some people can look out for their own interests without dicking over others. For some people, viewing other people's interests as an integral part of their own is "natural".

The difference between "looking out for your own interests" and "looking out for your own interests by fucking over everyone else" is subtle, I admit, but once you grasp the nuance you'll see why behaviors that are on the surface the same are ultimately different, and why one is evil and the other is acceptable.

Re:To quote Mel: "Its good to be the King"

[Anonymusing]

Why is it that people doing what people do naturally -- looking out for their own interests -- is normal and acceptable when you do it, but evil and wrong when somebody else does it?

Natural?! This is a Christian nation. As such, we do not look out for our own interests, but instead follow the Biblical commands to do nothing out of selfish ambition, vanity, or conceit, but in humility consider others better than ourselves. Each of us looks not only to our own interests, but also to the interests of others. We are peace-loving, considerate, full of mercy and good works, impartial and sincere.

Oh wait.

Re:To quote Mel: "Its good to be the King"

[wizardforce]

Stealing is looking out for your own interests too. However, society has rightfully restricted some selfish behaviors like stealing and fraud because they harm others. The ideal economic system would harness selfish desire to expand markets, increase efficiency and encourage innovation (ideal capitalism). When the economic system encourages self interest to the point of destroying others' wealth it's crony capitalism.

Re:To quote Mel: "Its good to be the King"

[Cryacin]

Exactly. A board is supposed to be a "trustee", a "custodian" to the shareholders.

Unfortunately, there are still numerous methods of "legal" *ahem* acquisition of funds by those in power on the corporate board. Enron was the first case where boards were whacked, and you can see the effect that it has had in such board rooms. The aforementioned people in power are very mindful that they don't wind up walking to the gallows. (And of course by gallows I mean at worst a small country club resort for a few months/ maybe a year.)

The severance deals such as poison pills and golden parachutes usually end up poisoning the shareholders and being a golden shower on the hard working employees. They very rarely do anything but line the pockets of executives.

But hey, thuggery, buggery and some skullduggery. A CEO's life for me!

Re:To quote Mel: "Its good to be the King"

[dave562]

In my mind it is the scope of reward that is evil and wrong. In the article, it is mentioned that one of the Sun executives is getting a severance package worth $175 MILLION dollars. That compensation package is enough to pay 1750 employees $100,000 for a year. Those 1750 imaginary employees who would be making that $100,000 are employees who are doing the jobs given to them by senior management. For all intents and purposes, those people are probably doing their jobs competently. Despite the fact that they are competent at their job, they are getting laid off.

People who are competent get laid off. The person responsibility for the health of the company gets enough money that he could pay 1749 other people a significant amount of money, even though he completely failed to keep the company going.

As the blog post mentions, the problem is fiduciary responsibility and the fact that in many cases (including Sun), the major share holders are also the executives themselves. So the CEO, CFO, Chairman of the Board and the rest of the executives set things up so that even in failing, they increased their stock value 42%. Thousands of employees lose their jobs, but those guys at the top get hundreds of millions of dollars among them.

There is a saying that "There is no greater sin than not knowing when you have enough." Corporate America is out of wack. The guys at the top fail so seriously that their companies go bankrupt. Despite that, they get millions of dollars. Employees who do their jobs don't get millions of dollars, and when the company fails they get assed out.

The "evil" that you don't understand is the rewarding of failure that leads to the suffering of others.

To make it easier to understand and to make a more basic explanation, lets replace "money" with "food". Lets say that the executive in charge of Sun has a machine that makes food for thousands of people. He runs the machine so poorly that it breaks down, and thousands of people no longer have access to the food it provides. In the process of breaking the machine, he manages to engineer it so that the very last time he runs the machine, it makes enough food to feed him, his family and his friends' families for a couple hundred years if they manage the food he created properly.

If there weren't laws in place to protect the asshole running the machine, the masses would tear him apart and divvy up the food he set aside for himself. Since there are laws in place, the asshole gets labeled "evil and wrong".

If there were justice in the world, or if the person running the machine were moral, he'd divvy up the remains equally among the tribe who helped him run the machine. There isn't justice in the world, and the man running the machine isn't moral. He took the lions share of what the machine produced and left everyone else out in the cold.

Re:To quote Mel: "Its good to be the King"

[jeffmeden]

That may be the job title...but how is that any different than other job titles like general manager, breakroom supervisor, technician, janitor. All of those people also have 'jobs' that support the interests of others...and in a less direct way, even the stockholders too. But you seem to have this thought, from your writing, that the top boss should somehow be more altruistic about their jobs vs their survival instincts.

All anyone is saying is that they should be rewarded/reprimanded based on how well they do their *job*, not how cleverly worded their compensation contract is that lets them only show up two months a year, drive the company into the ground, then walk away with enough money to last them the rest of their miserable lives. Until executive election becomes more transparent in cases like this, it should rightly be criticized for what it is, nothing more than an elitist cabal designed to enrich the wallets of those holding positions of power; by the elite, for the elite.

You seem to think that just because they make obscene amounts of money, and that people like you don't really know what it is that they do or how it is that they got their job, that they shouldn't be held to any measure of accountability and instead should be able to finagle any amount of money out of the company they want to, and be able to walk away scot-free when it turns out that they spent the past 2 years working in the exact opposite way they were supposed to be.

Many high level executives run their companies right, and recognize that they have a huge responsibility on their shoulders. Just because people like you have no problem robbing a company blind (out of self-described 'self interest') as soon as there was no one looking over your shoulder, doesn't mean that it should be acceptable.

Re:To quote Mel: "Its good to be the King"

[bennomatic]

Good point, although there are mechanisms which allow for transactions like this to end up similar to handing over a jacket for general shareholders to divvy up while a company's executive team walks away with millions for what are nominally the same stocks.

One of my own personal lessons: when WaMu was in the dumper, I bought a few hundred shares of their stock, feeling quite certain that they would be purchased by one of the more solvent banks, and at the worst, my stocks would retain their value in a trade for the new parent company's.

I was half-right. Chase bought WaMu, paid off their executives handsomely (one guy who'd been there three weeks got $18M), and then somehow said, "We're buying all the assets, but not the liabilities." The stock that was held by John Q. Public (i.e. me) was associated with the organization which retained all the liabilities, and is now worth just a few pennies. I would offload it, but the cost of the transaction ($9.99) would eclipse the value of my WaMu stock.

So it's all well and good to say that execs' fortunes are tied to those of their companies, but as it turns out, even that is not entirely true. There's always a way to game the system, and unless you're in the board room when it happens, there are very few protections out there.

The cost of the lesson to me? $600.00. Luckily, I could afford it. On the flip side, my grandfather was heavily invested in Enron based on his retirement fund manager's advice, and when they went down, he lost a thousand times that while their execs walked away richer than Croesus.

Re:To quote Mel: "Its good to be the King"

[ChatHuant]

"Since many board members are senior executives at other firms and sit on each others boards, there really isn't much incentive for them to not grant large parachutes and such. It simply wouldn't be rational to potentially jeopardize their own upcoming reward."

So, why don't the stockholder vote these board members out?

Of course, that's the simplistic answer. Reality is, as usual, more complex. There are many mechanisms in place that stop or deflect shareholder revolt. Some of the mechanisms are used by the boards themselves - information suppression or obfuscation (how many small shareholders are knowledgeable enough to understand the employment contracts of a CEO?), misleading reports, bad decisions that satisfy groups of shareholders (like paying dividends at the wrong time), and others . Some are not, like the inherent inertia of most shareholders, and especially the fact that many of the largest shareholders in major companies are institutional: banks, mutual funds, pension funds, investment companies. The boards of THOSE shareholders are exactly the people the GP was talking about, and they won't vote to replace their country club colleagues.

How Companies Work

[Bruce Perens]

How Companies Work

There are a few top managers, and they run the company for their own interests. If they have stockholders, they have to make some pretense that they are working for the stockholders, but look how much stock _they_ are getting out of the company. Sometimes they collect a $1/year salary to look good, while they get many Millions of dollars in stock per year. Rarely do people at this level work for anyone but themselves.

Then there are a number of second-tier managers, whose goal is to make the most out of the company that they can, or to make it to that top level so that they can run the company for their own interest. Sometimes people at this level have other motivations.

Then there are lots of other people. Often these people haven't even thought very deeply about what their motivations are. They are essentially treated as work-units which keep the company operating, but they are as expendible as a server in a rack. Fortunately, companies do need their talents, at least for now.

Then there are the small stockholders. They cross their fingers and hope the managers will do a good job for them, but they really do not have any power to influence the company.

Then there is the government. The government's job is to protect little guys with no power (the general population) from big guys with lots of power. But unfortunately the big guys essentially own the government, because of the fact that they pay for political campaigns and in other ways influence politicians, and because they are gate-keepers on jobs for voters.

All of this motivated self-interest is supposed to result in a good working system for the general population. It doesn't work terribly well. However, there are many other systems that work even worse, so people are reluctant to change it. Also, the average person can not be bothered to concern himself enough so that in the aggregate with other people that person can effect change.

Re:How Companies Work

[nedlohs]

If those top managers are being paid in stock instead of in dollars, then clearly they are stockholders and hence their interests are one and the same as the stockholders. Which is the entire idea behind such compensation schemes.

The real issue is that the stockholders are getting exactly what the want. Short term performance, and who cares about the long term. Since most of the shares are owned by mutual funds and so on and what they care about is how they did on last quarter's performance numbers.

That the company will go broke in 5 years is irrelevant, they just want to perform better than their competitors this quarter. And since they make up the bulk of the owners that's how it is supposed to work.

If the owners cared about long term performance they would structure compensation schemes to reflect that - mind you that is easier said than done. Short term stock price incentives, however, are just about the worst way possible to do that.

Re:How Companies Work

[Bruce Perens]

If those top managers are being paid in stock instead of in dollars, then clearly they are stockholders and hence their interests are one and the same as the stockholders. Which is the entire idea behind such compensation schemes.

Well, sometimes. In this particular case, the Golden Parachute was constructed purportedly to make a hostile take-over unattractive. Otherwise, perhaps Carl Ichan might have owned Sun before now. But it is not at all in the stockholders interest at this point.

We also have cases in which the managers receive different classes of stock from others. This seems to have been the case, for example, in the recent acquisition of Monta Vista, a former embedded Linux companies. The employees are said to have gotten $0 for employee stock, but some tiers of preferred stock took real money out of the company, as did the managers.

Well, sure they sucked...

[elrous0]

...But if we hadn't paid them a competitive salary we might have lost them.

Ahh, the good old days...

[stokessd]

I loved my sparc 1+ with the funky ruled reflective mouse pad, and the quirky SunOS. For some reason I always wanted pizza for lunch after working on it all morning. Ahh those were the good days, oh mosiac how we used you to find things in the larval days of the web.

Linux really ate Sun's lunch. All the reasons to own a Sun largely evaporated with Linux. I say that as a researcher and end user, not a data center wienie. As soon as linux and commodity hardware got good enough, it was all over for Sun. I really feel bad (and old) but frankly I'm surprised that they lasted this long.

Sheldon

Reaganist? No, Economists.

[Anonymous Coward]

In the introduction I referred to what I call the "Reaganist dogma" of the free market, my description of what a Republican might refer to as "capitalism" as opposed to "socialism".

Reagan got that from the economists. He didn't think that up himself. That's one of the incorrect assumptions economists use in their models and theories - free markets always work and that the market is rational.

Free markets work only within a narrow range of economic activity. If they exceed those ranges then you get bubbles and collapses. That's why the Fed was created to try to eliminate those things. Of course, if you get a Randian dogmatic believer in the free markets of a Fed Chairman (Greenspan), then you end up with serial bubbles: stock market and real estate.

There's a few other blanket assumptions that economists make that are horribly incorrect in the real World, but I'll save those for another time.

Oh, and economists need to get over their physics envy. They develop these impressive mathematical models and everything but the underlying assumptions are incorrect. As in this example, the assumption is that markets are rational. As we have seen, they are hardly rational.

Reading assignment: rational irrationality.

Oh, OK the last thing: the behavioral economists are redeeming the whole "profession"! :-P

Re:Link to DailyKos diatribe?

[Zocalo]

Well, not that you mention it... :)

Diatribe or not (no, I didn't bother to read it), I don't think Oracle's is going to be anywhere near the kind of situation Sun ended up in for the foreseeable future. Sun had multiple sources of direct competition across a good deal of their product range and many IT budgets just couldn't justify paying the extra cash for the few extras Sun brought to the equation. Oracle, on the otherhand, has seen off almost all of its competition: DB2, Ingres and Informix are either history or essentially relegated to also-rans in the marketplace for high-end DB servers with paid-for support and an SLA that you could take to court if you had to. It's going to take a screw-up of positively epic proportions for Oracle to go down the pan; "dropping the ball" wouldn't even come close...

Not very shocking

[Angst Badger]

Techies often have trouble understanding this, coming as they do from a very strongly meritocratic culture: the world at large is so far from being meritocratic that the sheer extent of its non-meritocracy strains the imagination. Professional academics often run into the same blank wall of incomprehension.

By no means am I saying that this is a good thing, or even that it is strictly necessary (though that is certainly a possibility given primate psychology), but the fact remains that the normal means of acquiring wealth is by conniving, cheating, swindling, and deceiving to one degree or another. If wealth was awarded on the basis of hard work, knowledge, or creativity, then the world would be full of super-rich construction workers, mathematicians, and artists. Instead, it is awarded on the basis of how good you are at talking (or coercing) people into giving it to you. Period. Things like quality, reliability, creativity, and utility are, at most, means to an end, and are by no means indispensable, except perhaps as grist for motivational speeches given to the people who do the work by the people who receive the rewards.

Here is a theory

[mbone]

Here is a theory that I heard expressed by a C level corporate executive :

The top people should be paid enough to make the people on the rung just below them green with envy, so that they will work their butts off to get to the top, and so on, proportionally, down the line. (In other words, the motivation is not greed, but envy.)

I haven't heard this expressed much in public, but it explains the high payments and bonuses in bad times much better than the "we pay them for their successes" theory.

Re:Link to DailyKos diatribe?

[spun]

What's wrong with DailyKos? Do they, you know, actually lie, or do they just say things you don't want to hear? If you think they lie, provide a documented example.

American companies are unique in this respect.

[reporter]

With regards to highly compensated senior management, American companies are relatively unique. Among Japan, Europe, and the USA, the ranking from highest relative compensation for the CEO to lowest relative compensation is the following.

1. USA

2. Europe

3. Japan

Here, "relative" means dividing (1) the annual income of the chief executive officer by (2) the average annual income of the employees who are not part of the management structure.

Table 2 on page 6 of an interesting document analyzing the financial compensation of American CEOs is instructive. For the sake of this discussion, we can reasonably assume that figure in the aformentioned category #2 is approximately the same throughout the West.

Table 2 then, in effect, gives us the relative compensation of the CEOs in the West. The typical American CEO in 2003 received annual compensation that is worth $2.2 million. The typical European CEO received $700,000. The typical Japanese CEO received $460,000.

Was the American CEO worth his pay? American neoconservatives answer, "Yes." They say that such compensation enables American companies to be top-notch competitors in high-technology.

On 2009 November 5, "The Economist" issued a startling report. It asserts, with plenty of evidence, that Japanese companies are the sole manufacturers of numerous components that are critical to the operation of high-technology devices ranging from tiny disk drives to huge nuclear reactors.

So, who is telling the truth? American neoconservatives or the "The Economist"?

Blah blah Kos blah blah

[idiotnot]

Golden parachutes aren't a Republican phenomena, and the Silicon Valley tech companies aren't exactly fertile ground for the GOP as far as fundraising goes.

Nor is rewarding mediocrity limited to the upper-echelons of society (see: Detroit).

What the author did get right is that the boards of directors make these decisions. In companies where a scant few hold lots of sway, they look out for themselves instead of the working minions. Think Carl Ichan ever got a raw deal on a company he came in and dismantled?

The fixes are simple, but neither political party has the political will to do it. The tax reforms in 1986 allowed most of this, and it benefits wealthy interests (read: donors) on both sides of the aisle. Think Bear Stearns was a high-time GOP operation? How about Fannie and Freddie?

1. Tax stock options as regular compensation, taxed at normal income tax rates. Tax it at the stock's full price on the day the option is exercised. If the option is never exercised, fine. The executive doesn't pay the tax.
2. Place a time limit on option execution.
3. Tax fringe benefits as compensation (hello, "Cadillac" health plans).
4. Encourage firms to hire executives on fixed-term contracts with fixed compensation. Stop making compensation based on stock price performance.

But it'll never happen. And, while I'm glad to see that they're taking notice, the stupid from dKos burns. It burns a lot.

Wow, you just don't understand any of this, do you

[Estanislao Mart�nez]

I was half-right. Chase bought WaMu, paid off their executives handsomely (one guy who'd been there three weeks got $18M), and then somehow said, "We're buying all the assets, but not the liabilities."

All three parts of your claim there are wrong, which makes you completely wrong, not "half-right." From :

"On September 25, 2008, the United States Office of Thrift Supervision (OTS) seized Washington Mutual Bank from Washington Mutual, Inc. and placed it into the receivership of the Federal Deposit Insurance Corporation (FDIC). The OTS took the action due to the withdrawal of $16.4 billion in deposits, during a 10-day bank run (amounting to 9% of the deposits it had held on June 30, 2008). The FDIC sold the banking subsidiaries (minus unsecured debt or equity claims) to JPMorgan Chase for $1.9 billion, which reopened the bank's offices the next day as JPMorgan Chase branches. The holding company, Washington Mutual, Inc. was left with $33 billion assets, and $8 billion debt, after being stripped of its banking subsidiary by the FDIC. The next day, September 26, Washington Mutual, Inc. filed for Chapter 11 voluntary bankruptcy in Delaware, where it is incorporated."

To understand that passage, it's important to know that publically-owned banks in the USA are structured as a public holding company, which privately owns a bank. This is important because what you bought was shares of Washington Mutual Inc. (let's call it WMI), the holding company for Washington Mutual Bank (WMB). WMB failed, so the OTS seized it away from WMI and gave it to the FDIC, which then disposes of the assets and liabilities of WMB in order to make insured deposits and secured debtholders whole. At that point, WMI is bankrupt, so your stock investment is not really worth nothing anymore.

But the more important thing to note is that Chase didn't buy WMI from the shareholders; they bought from FDIC the WMB assets and obligations that the FDIC was on the hook for.

You're also wrong about the "buying all the assets, but not the liabilities part." From the FDIC statement on the closure:

"Subsequent to the closure, JPMorgan Chase acquired the assets and most of the liabilities, including covered bonds and other secured debt, of Washington Mutual Bank from the FDIC as Receiver for Washington Mutual Bank. Any claims by equity, subordinated and senior unsecured debt holders were not acquired." [my emphasis]

This is a standard FDIC bank closure; the FDIC takes care of insured deposits and secured debt of the banks it takes over, and only if there's anything left over from the bank's assets, then unsecured creditors and shareholders get some (in that order). Chase bought the WMB's assets and all the liabilities that the FDIC is on the hook for. The liabilities that Chase didn't get are the ones that the FDIC doesn't normally cover. So basically, the folks who are owed those debts were wiped out by the FDIC takeover, not by the sale to Chase.

And thirdly, the WaMu executives that you claim got paid off handsomely were not paid by Chase. They were paid by WMI, the holding company that went bankrupt. Though the $17.5 million guy actually declined it:

"Chief executive Alan H. Fishman was flying from New York to Seattle on the day the bank was closed, and eventually received a $7.5 million sign-on bonus and cash severance of $11.6 million (which he declined) after being CEO for 17 days."

So basically, you made a bet on a bank that was about to fail, without understanding even a single iota of what happens when banks fail, and then you failed to learn how your investment failed. I can certainly understand and sympathize the part about making the bet on something you don't understand, if you hedge your bet accordingly (which you certainly seem to have done). What I can't understand is your inability or refusal to actually learn how your investment failed.