Berkeley Haas Talks Perks and Perils of Golden Parachutes
Since the idea of a golden parachute was popularized in the early ’60s, used as a tactic to remove a then mentally deteriorating Howard Hughes from his company Trans World Airlines, it has become synonymous with corporate exuberance. However, according to new research from the Haas School of Business at Berkeley University, there is a positive benefit.
Post-financial crisis, many corporate leader, tycoon-types—executives, brokers, and bank presidents—deployed their “golden parachutes” to land safely on solid ground with pockets comically stuffed while their respective companies requested “taxpayer bailouts or fire-sale takeovers.” It certainly wasn’t pretty when the public got wind of this tactic and the pressure was on to link compensation more tightly to tangible success.
In new research by Hasler Chair in New Enterprise Development and associate professor Gustavo Manso, he argues, “companies that want to blaze new trails should not penalize managers whose efforts don’t quickly bear fruit.” In other words: “You need to reward early failure and focus on long-term results.”
Manso’s research uncovered that the types of incentive packages that “pay well despite short-term failure” are sometimes needed to “motivate managers to take risks and try new things.”
While pay-for-performance is ideal when “known techniques” are employed, managers tasked with innovation “must be paid for long-term, not short-term results, and they should not have to worry about losing their jobs if new methods fall short.” But Manso warns that companies must carefully monitor managers so they don’t take advantage of compensation plans that tolerate short-term failure.
Manso elaborates, “It’s always a balancing act. It’s not always optimal to experiment.”