Executive bonuses: heads you lose, tails I gain

February 25, 2009

Professor Tamar Frankel— Tamar Frankel, a professor at Boston University School of Law, is author of “Trust and Honesty, America’s Business Culture at a Crossroad.” The views expressed are her own. —

The debate over corporate executive bonus payments should be put in perspective.  Some say that the executives did not earn these bonuses and don’t deserve the millions in parting payments that they received.  But if parting payments were specified in the executives’ contracts they must be paid.  A binding contract is binding.

But what if the payments were made at the discretion of a board of directors, as bonuses usually are?  Can such bonus payments be retrieved from the executives?  Probably not.  Unless the executives failed to give the board accurate information, or illegally caused the payments, they are entitled to retain them.

But directors who approved bonus payments notwithstanding the corporations’ losses may not be as free of liability.  Unlike salaries, bonuses are usually paid at the discretion of the employers.  They are awarded not as a matter of right but as a recognition that the recipients have done a good job.  In the past, most were tied to the “performance” of the corporations, usually defined in terms of higher profits or higher share prices.

The lore was that “executive talent” must be rewarded with money or stars would migrate elsewhere. And without such talent the corporation — and America — would be lost.  But this wisdom has now extended to non-performance situations where talented executives received bonuses no matter what happened to their corporations. The current crisis might not have been their fault, the reasoning went.  They did their job.  They performed well.  They worked as hard as they did years before.  Why should they be punished because the economy is in recession?

There is one answer to these arguments.  When bonuses were linked to “performance” (short term rise in corporate profits and market share prices) executives collected incredible amounts.  That may have been how the corporations took so much risk — to earn so much that the bonuses could be huge.  But whatever the reason for the profits and share-prices rises, the bonuses were linked to these measures and the executives did not complain.  So they cannot complain now, and the directors cannot suddenly change the rationale for the payments.  What was good for many good years is good for bad years.

Historically, executives and their supporters pressed hard for payments reflecting the owners’ fortunes, even though executives are not the owners and never were, unless they owned the corporations’ shares.  Their payments were based on the theory that their incentives should be identified with those of the shareholders.  If this theory is valid, let them share the shareholders fortunes today just as they had in the boom time.

Executives cannot be sued to repay the bonuses they received when their corporations were sold in a “fire sale” or went bankrupt.  But the directors who were generous at the expense of their corporations (with which they had a legal obligation to honestly and diligently represent) can be sued.  And if the executives do not return their bonuses to the corporations, the directors should repay the corporations.

Generosity is fine at one’s own expense but it’s not fine at the expense of others whom one represents.  Directors and executives should settle the accounts among themselves.


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The tactics that many of these men use would make Tony Soprano blush. What did you expect? Alot of these people are sociopaths. Who would engage in this? Who would package and sell debt to unsuspecting investors overseas? Talk about outsourcing. That is what a CDO is. It is bundled debt, with no underlying value. These people are criminals and they belong in prison. The damage they have done is incalcuable.

Posted by phoenix1 | Report as abusive


Posted by Keith Bettencourt | Report as abusive

They leveraged themselves 30 to 1 backed by an orgy of worthless sub prime paper with full knowledge of the risks. They are responsible for the curent state of the economy. These greedy firms were forced to liquidate “real” assets when the margin calls came in afecting everyones investments. This tanked the entire stock market. Why would we reward this irresponsible behavior with bonuses afforded by hardworking tax payers is repugnant and criminal. I say prosecute them to the fullest extent of the law and make an example of the trully despicable firms. There is no shortage of theivery. Confidence must be restored. Heads must roll before any sane investor would hand these scoundrels assets to invest. We have no transparency with theTARP funds that were allready given out. With every indication Merrill lynch gave out 3.4 billion in bonuses. The tarp funds are not even being used to free up the credit markets. Somethings gotta give.

Posted by Rich | Report as abusive

Partially WRONG!
I agree with the logic: what’s good in the good times (bonuses) should also be good in the bad times (no bonuses).
I DISAGREE with not expecting these executives to return their ill-gotten gains. A contract is a contract you write. Implied in that contract is that the executive will perform. We pay executives to perform through thick and thin and expect they will exercise their well-compensated knowledge and experience to keep their companies from disaster.
This is not what happened. Instead these executives were pushed out (to appease stockholders or to qualify for government funds)with handsome severance packages. We want these returned. They did not accomplish what they were paid to accomplish.
I DO LIKE THE IDEA OF HOLDING DIRECTORS ACCOUNTABLE. This incestuous inbreeding has culminated in many of the problems we see today. Holding directors accountable will ensure they take their role more seriously beyond the prestige the role accords them.
Brenda Avadian, MA
TADWU.us (The American Dream WAKE UP United States)

Posted by Brenda Avadian | Report as abusive

Well written. I am on the board of 3 companies and these boards are industry and company related. Meaning the boards are made up of company employees from the bottom up and or industry experienced people. We did this to get the best and brightest and most experienced. Bonuses were always tied to job and company performance. We should have had poor performance penalities (the skinning approach)
If we had lay offs the execs did’nt suffer. The made enough to hedge a couple of years of unemployment – not the workers. (the skinning game)
Trying to claw back a group of board menbers, who TRULY THINK they are masters of the universe, will be like getting names from the Swiss banks.
This crowd looks at the masses as necessary worker bees and they believe they have the power to create, control and withhold wealth at anytime.
Maybe we need to look at our reward system. Good managers may need to be compared globally. The US structure is rigged. Look at the managers, leaders of the largest international companies and they make far less than their US counterparts. And I do believe they are the BEST AND BRIGHTEST
Keep up the good work – You got my attention

Posted by Dean | Report as abusive

The first paragraph contains a non sequitur – just because you hold a lawful contract that states you are owed something, does not mean that you deserve it.

Ethics is knowing the difference between what you have the right to do and what is the right thing to do.

But by all means, sue the fools that issued those contracts, and let them regret opening the coffers to the corporate thieves that take whatever they can.

Posted by JoeOvercoat | Report as abusive

From all sectors of society, up goes the shout: “We didn’t read the small print.”

One can surely go further, and argue that, as part of due diligence, the shareholders in their turn should have asked whether the remuneration committees of the companies in which they were planning to invest were making such hare-brained payments to executives, and if they were, voted with their feet. If the company lied to them, then OK, let them sue. But if the company made their compensation policy plain, and the shareholders accepted it because the company was also paying high dividends, well…..

Posted by Ian Kemmish | Report as abusive

Non-performance based bonuses, otherwise entitlements, is a recipe for demotivation created by unmatched fiduciary irresponsible. In simple terms English, it’s stupidity. That the “other companies” were doing it is as unacceptable now as it was in Kindergarten.

Suing board members may or may not result in monetary awards, but it may force regulations that protect shareholders from future purchases of the emperor’s new clothes.

Posted by Gary S Hart | Report as abusive

I wouldn’t have a lot of problem with the huge bonuses except they are/were an integral part of the “too big to fail” syndrome. If we let them fail, everybody loses so the dear taxpayer gets to bail them out which subsidizes their excesses. If they want to gamble it’s okay to let them gamble with their own money but not the taxpayer’s money. To that end, the only real solution is a lot of oversight and regulation and as we are beginning to see, that is anathema to the masters of our universe.
What we really need is some kind of effective punishment for financial crimes. A year or two in a Fed minimum security country club after months and months of legal wrangling and trial is no deterrent when people can steal billions. Not to mention the cost of lawyers, judges, prisons, etc. We could take lessons from the Chinese. If you want to defraud the people, you’re likely to pay with your life if found guilty. Rapidly.

Posted by Ray | Report as abusive

Ray, you hit it on the nail. We do indeed need effective (I might add harsh and swift) punishment for high financial crimes. Our American Capitalistic system puts the almighty $$ on such a high pedestal that a majority of us are clueless and consistently justify the exploitation and extortion committed by these self-indulgent financial thieves ALL in the name of maintaining the status quo (economic growth and money flow). Unfortunately, I feel our current economic system will not sustain itself due to its greedy, immoral, and inhumane nature (we’re seeing the beginning of this failure unfolding now…something I’ve been predicting since early 2000).

What’s good enough for our petty criminals (minimum sentencing, three strikes, etc.) is more than good enough for these “best and brightest” high-financial criminals. In my 45 short years of life, I hold no hope in our current capitalistic system (I’ve had that American Dream carrot stick in front of me for so long it’s a stinking now!!!)

Viva economic revolution!

Posted by JahLove63 | Report as abusive

I disagree with the rationale and logic behind it. Corporations and for that matter households have one thing in common. If house has less money and they have to tighten the belt and maybe go and eat less food, not drive a expensive car, buy clothes at a fashion boutique, or may not buy anything less than basic necessity, or get a line of credit and get credit cards and file for bankruptcy and let everybody holds the bag for them.

Corporations are not any different from an household. profits and share prices are cyclical and should be reflected in the compensation on the long term and net compensation should be the rule not aberration as CEO and Board of Directors may come and go but businesses with their tangible and intangible assets with all the employees, customers and communities are still there even if those people are not there. There should have been a claw-back or still legally business should get excessive compensation paid to them should be given back as a way for adding carrot and stick philosophy.

It is almost talking about real estate bubble caused by ranking members of congress and senate who did what they thought was morally right but fiscally impracticable but it was no money of their back. banker lend they money collected compensation for their performance, real estate agents collected enough commission and stupid people or stupid illogical speculators hoping to make quick buck caused the problem. Now taxpayers, home owners and cities which depended on inflated price of the properties and can not collect the taxes and have to reduce the service are paying the price for all the borrowed concept of economy.

Government, states, cities, corporations, society, and individuals all have to be responsible for their actions. It is not what this or any action will help me but how much harm it will do to my community, city, state, Government or other people in this small world which we are seeing as a affect of small ripple and has become a tsunami which may bring down the whole of financial and social system as we know it today.

Posted by vj | Report as abusive

Barbarians disguised as capitalists is what cowboy capitalism is. In the name of better, efficient, profitable company, CEOs/Board Members of PUBULICALLY TRADED companies justify controlling financial assets, inflate short term profits through derivatives trading and rape the shareholders, and the masses. Their “productivity gains” come at the cost of worker and customer pains. Anyone tried to call their bank and got to customer service right away?? Well productivity gain by reducing worker count but pain for overworked workers, customers. And these productivity gains are to be considered as efficiency gains? Are you joking?

These board members (usually CEOs of another publically traded company and hence cronies) or executives do not hold the majority stocks in the company, and their motivation is certainly not company’s well being and value creation. They could care less for the stock holders. Once they have short term gains, they get their bonuses and then they move on to next corporation, leaving the stinking trail behind.

The only way to allow these executives to stay on is give them a nominal 5% discount on company stock price to purchase through their hard earned cash (salary). What is this idea of bonus? Are they not supposed to do their job anyway? Bring some sanity to executive pay in publically traded companies. Privately owned companies are different matter; there it seems executives will and should care about true value and not the facade of short term stock price gain.

Posted by Santosh | Report as abusive

Professor Frankel is absolutely right. When are we going to see the first class actions against these criminal individuals? How practical is this, if at all possible?

Posted by Luigi Magliocchi | Report as abusive

[…] professor in the School of Law, offers commentary on executive bonuses in a piece written for The Great Debate on […]

Posted by Executive bonuses: heads you lose, tails I gain | BU Now | Report as abusive

I find Miss Frankel’s position troubling. A contract is binding if and only if it is validly entered into. Implicit in every contract is the notion of capacity to contract. Part of the legal notion of capacity to contract is the ability to perform the actions, tasks, activities promised. What is missing in this discussion is what is also wrong with the contracts that these executives’ sign – measurable proof of ability to perform the actions promised and knowledge and expertise on the part of the corporate partners to objectively assess satisfaction of terms. Many of these companies rely on boards filled with the same pool of group thinkers that these CEO’s are culled from. It’s a club which reinforces the collective delusional thinking that permeates corporate culture. The real issue here is that we are using legal reasoning to reach absurd results and reward incompetence. That is fundamentally wrong and stupid!!!! These people were in no way competent to perform the things contracted for and the people who approved these contracts were not competent to determine whether satisfaction was achieved! Many of the underlying actions needed to satisfy the terms of these contracts from a performance perspective were objectively not possible and belief that they were was (and is) objectively delusional. These were not contracts for services, they were contracts to lie to each other and scratch each others backs at the expense of shareholders. Whether in a court of law or equity, this type of travesty of legal process is wrong and contrary to what the law is about. And its high time lawyers spoke up about this nonsense! Should attempts be made to recover these ill-gotten gains be made? You’re darn right they should! And we need to stop talking nonsense about it…. JD

Posted by jd rhodes | Report as abusive

This is an excellent article! Directors are presently and always have been -behind the cloak. Time to remove it!

Posted by Terry | Report as abusive

The problem is more deep-seated than this. Directors should be accountable; but they are not–the vast majority of publicly-traded companies are controlled by institutions (mutual funds, banks, etc.), who have for years resisted efforts to limit executive compensation. Those institutional investors elect the directors, who often rubber stamp whatever management presents in terms of compensation packages, on the theory that management should run the business. Times clearly indicate that management has not performed well, and although corporations can carry their losses back and forth to eliminate past income, shareholders cannot and while losses can be carried back, that doesn’t help address the problem that compensation was paid based on earnings that turned into losses in a later period. Because these same insitutions support your local politicians with contributions, etc., in the battle to choose who to protect — individuals or corporations — guess who wins?

Posted by cyn | Report as abusive

Sales people are motivated and paid directly on performance. A standard clause in their contracts states that in order for them to keep their commissions, the sale must hold. There are a hundred and one ways to juice the game (such as stuffing the channel, etc), and so companies protect themselves from this. Having this be non-existent in the banking sector is beyond immoral. I’m not saying that anyone should be penalized when the whole market tanks. But look at all the pensioners losing their benefits, while the top dogs are getting to keep their millions. If it is found that the profits that paid your bonuses were based on illusory money, why should you get to keep your money? Why are we even debating this???

Posted by James Perly | Report as abusive

“Generosity is fine at one’s own expense but it’s not fine at the expense of others whom one represents.”

If only this same sentiment were applied to the bureaucrats that confiscate our earnings and generously redistribute it to those that allow them to continue in their own pursuits of power.

Posted by P Smith | Report as abusive

This reeks, guys like Stan O’Neal, John Thain et. al. have walked away with 100s of millions of dollars, while destroying not only their companies but bringing the world economy to the brink of collapse. There are literally millions of people worldwide who had nothing to do with the mess but are now suffering because of these greedy clowns. To have them retire to their 14 room mansions while millions suffer is unacceptable. Laws are made to bring justice to society. These people must be made to give back all they have looted, and do stiff time in prison. Change the laws.

Posted by paul | Report as abusive

You should address the grievances with your local politicians, the current rules of corporate governance are clearly not based on moral principles – though corporations would like you to think so (ie. social responsibility, credos etc). The notion of rewarding failure is sort of a norm as the recent government actions demonstrate with a taxed revenue, so what do you expect from publicly traded firms? There is a clear imbalance between accountability for failures of judgement in the executive contracts and a link to compensation. It starts with the recruiting standards which are very poor and biased. The boards fear that no-one will accept harsh contract terms. I’m affraid the whole society is geared towards immoral behaviour it’s just that during affluent times the failures are not disclosed and it makes little difference who is at the controls. When times get tough the real leaders shine out.

Posted by Franz Kafka | Report as abusive

Excellent article by Professor Frankel, devoid of the usual cynicism and envy that usually permeates most opinions about this subject. I agree totally with her sentiments regarding directors’ liabilities but would also point out that they have agreements too. They may well be indemnified from such suits and should action be taken, the onus could fall back on the corporation and hence, the shareholders. Since most extraordinary executive compensation consists of stock, there is a simple solution: no employee, executive, or director of a public company should be allowed to own or trade in their company’s stock. Call me crazy but these, in case you haven’t noticed, are crazy times.

Posted by profjack | Report as abusive

A very clever analysis of the psychology behind bonuses and a very appropriate conclusion that the board of directors can and should be held accountable in many cases. They had a fiduciary duty towards shareholders and they violated it by being generous at the wrong time and for the wrong reasons.

Posted by Jake Berzon | Report as abusive


1. A contract is a contract.

2. Directors are protected by the “business judgement rule”. You would need to show bad faith/self-dealing to hold them accountable.

3. Folks could consider new legislation going forward, but not backward-looking for things already closed. Consider (i) cdo/credit swap/derivatives/lending rules that were avoided over the last decade or so or (ii) allowing only equity bonuses with long term (even post employment) vesting rules.

4. Not anyone was complaining when stock and housing prices rose consistently, and without any basis in underlying value (stocks: actual earnings; housing: cost of ownership vs rental cost), but were simply happy to treat these assets as perpetual cash-and-goodies machines.

5. The only issue with lenders re-selling their loans is (i) it makes them toss credit-worthiness concerns out the window and (ii) we had credit rating agencies rubber-stamping all loans as AAA (wondering when there will be fraud claims on this point?).

6. If everyone who took out a home loan would pay it back, we would not be in this situation.

Posted by rbsjr | Report as abusive

Well done.

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