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Monday, June 26, 2006
Paid to Fail
The entire hubbub about the prenuptial agreement between Nicole Kidman and Keith whatever-his-name-is started me thinking about golden parachutes. A golden parachute or a predetermined severance agreement is basically the same thing as a prenup. Two parties agree to a union of sorts but at the same time go ahead and lay out the plans for the dissolution of the union. It seems to be a logical legal precaution.

I can see the value of a prenup in a celebrity marriage, the lifespan of which will be slightly shorter than the time it takes water to boil. Golden parachutes are a bit different, though, in my opinion. Employment is basically a contract for services (we could make that comparison for the marriage side but I’m not going to go there right now). In employment, the employee provides services (work) to the employer for a fee (compensation). Just like someone who repairs your car, if the work is done satisfactorily you return the next time your car needs to be fixed. If it’s not done right, you find another mechanic. Using the same comparison, if your mechanic had a golden parachute or severance agreement with you before he started work on your car, he would not only get paid for shoddy work, but receive a bonus.

I believe in a free economy. After all, I’m a business owner myself. I go out into the market and make my living, basically, on 100% commission. If I don’t produce, I don’t eat (more or less). For some people who have negotiated a golden parachute, if they don’t produce they still eat, often quite well. This takes away the incentive to perform. Why stress and go all out when you are going to be rewarded for failure?

Don’t get me wrong – severance packages are fine and I believe they are called for when an employee is laid off or otherwise terminated through no fault of his own. It’s generous of a company to assist in costs related to outplacement and lost salary for a short period of time in order to allow the employee to find new employment. I have a problem with rewarding people for failure. We are starting to see this phenomenon all through our society and its effects are worrisome. Rather than rewarding excellence and drive, we dole out pats on the head for failure.

I traveled to Eastern Europe several years ago and noted that the older workers didn’t seem to care much about the quality of work they did. I noted particularly what I called “the rest room ladies”. If you used a rest room in a train station, restaurant, or other public place, it was likely the rest room had an attendant sitting by the door behind a table. In the US and western Europe, rest room attendants make sure the rest room is kept sparkling clean and that any possible toiletry item you need is at hand. For their diligence and excellent service, they are rewarded with tips. In the country in which I was visiting, however, the rest rooms were invariably filthy; there was no toilet paper, and rarely any soap. Still, the rest room lady expected a tip. “For what?” I thought, “Sitting by the door?” In fact, that is exactly what they expected. As my guide explained, under communist rule, it did not matter if you did a good job or not because you got paid anyway. These people were only doing what they had been conditioned to do – expect payment for nothing.

Essentially, that is exactly what a golden parachute is – payment for failure. Even CEOs who literally cause their company to tank still are entitled to their huge severance packages because of the pre-employment agreement they signed. We need to start calling a spade a spade and stop rewarding poor performance. Imagine the success we would see in this country if everyone worked on a 100% commission basis!

November 2005 / December 2005 / January 2006 / February 2006 / March 2006 / April 2006 / May 2006 / June 2006 /


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