Last Updated 29 Mar 2021

Golden Parachute

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Often in a stack of current newspapers, the front page topics that will catch your attention are ethical issues behind upper management compensations; in this case, on March 30th 2009, the issue that surfaced was Rick Wagoner’s leave from GM and his retirement package and how his actual/ base compensation doubled in his last year from approximately $7M to $15M. With the current economic crisis, many people outside the business society have become aware of the ridiculously high income difference between top managers and regular working citizens.For instance, terms such as ‘golden parachute’ have been put under the limelight and are scrutinized. Golden parachutes are severance pays to CEOs when they leave their company. The amount of money is usually influenced by the size of the business and the effort they put in. The golden parachute was once used to ethically to compensate CEOs who sacrificed their time and effort for the business; however, this is currently not the only case. Before we get into more detail, it is important to understand that the golden parachute once had a reason for being employed.

With many mergers and acquisitions during the second industrial revolution, CEOs were offered compensations proportional to how much their effort was worth. According to the Journal of Business Ethics, this was an ethical standpoint because it was followed by two positive effects. First of all, golden parachutes encouraged mergers and acquisitions as opposed to bankruptcy. For instance, the CEO would choose to merge with a competitor and leave with an enticing amount of money.

This minimized unemployment and loss of structural capital which is result of bankruptcy. Another positive effect in using the golden parachute was attracting an effective management team. Great CEOs are essential for the success of businesses, yet great CEOs are low on supply. As a result, golden parachutes can be ‘recruitment tool[s]’ and can bring the business back into an economically stable position. In essence, golden parachutes were and can still be ethical if the CEOs receive compensations proportional to their effort that was put forth to the company.

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However, although these compensation packages began as an alternative that maximizes the sum of stakeholders’ satisfaction, many CEOs began to abuse this privilege. Highlighted by the principle agent theory, most people would prioritize personal incentives above all else. Therefore, it is understandable for a CEO to pursue personal incentives. However, fiduciary responsibilities to shareholders must be reinforced by boards. It is human nature to prioritize personal needs, but it is unethical to harm the business or shareholders during the process.

Therefore, whether or not golden parachutes should or should not be mandatory remains a moral dilemma. The question still stands; is it defendable that CEOs deserve and have rights to collect golden parachutes? In a current issue, Rick Wagoner, CEO of GM, was asked to resign by Obama due to his failure to submit a restructuring plan. As a result, he received a whopping golden parachute of $20 million. If the decision was put in the hands of many tax payers, he would not have left with $20 million due to his track record. According to ABC News, under his leadership, “GM lost tens of billions of dollars, took billions in taxpayer-financed aid, and cut tens of thousands of jobs, including announced plans to cut 47,000 employees by the end of 2009”.

On top of that, he was included in a scandal, late 2008, where he was witnessed to have flown private jets when asking for a government bailout. With such exposure, tax payers are petrified with the fact that their money is going towards a paying a company which failed restructure.

Thus, many argue that he did not deserve the money since he neglected his responsibility as the CEO of GM to look in the best interest of the stakeholder. On the other hand, GM and the government had to, by law, give Rick Wagoner the pay since it was already negotiated; thus, he was entitled to retirement funds. As a result, another ethical issue may arise based on whether or not he deserves the pay. Let’s also not forget the fact that he worked in GM for 32 years.

On top of that, if a golden parachute was not offered, many capable CEOs will lose incentives and GM’s financial position may not be able to recuperate without an effective leader. In essence, the dilemma a remains in debate regarding whether or not the benefits of golden parachutes override the possible abuse of this privilege. To further analyze this case, this dilemma was applied to the seven step decision procedure. Moral Standards To start off with, the first step to the decision procedure is to identify moral standards.

Since each stakeholder’s interests vary, there is a conflict among personal goals, beliefs and values. For instance, CEOs and board members take action to maximize their pay due to personal goals; however, it may not be in the best interest of the company. As a result, by pursuing this goal, CEOs and board members believe in egoism where they look solely in the best interest of themselves and consider it as a means to goodness. They also believe that with a capitalist economy, the government should not intervene and should grant businesses’ their freedom resulting a laissez-faire perspective.

Similarly, shareholders also intend to maximize their income and personal incentives. In doing so, they value trust and honesty and expect fiduciary duties to be met. Moral Impacts The second step is to recognize all moral impacts and how they either benefit or harm stakeholders. It is also important to identify any rights that are linked to entitlement and/or duty that may be recognized or violated. The following chart is a cost/ benefit analysis if the government was to allow the practice of golden parachutes.

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