Here’s Why Fired Execs Keep Walking Away With Huge Payouts

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Last week, after two Nike executives departed from the company following an internal investigation into workplace misconduct, Bloomberg reported that one executive — former brand president Trevor Edwards — is walking away with a $525,000 payout and almost $9 million worth of unvested stock.

The payout isn’t exactly chump change, especially when it’s going to someone who, according to the Wall Street Journal, “protected male subordinates who engaged in behavior that was demeaning to female colleagues.” But it’s actually nothing compared to other companies who write huge checks to executives with bad track records. Just last month, Lululemon CEO Laurent Potdevin resigned from the yoga apparel company. While the brand merely cited that he “fell short of standards of conduct,” several anonymous employees told Racked the former CEO was dating a designer on staff who received treatment and opportunities not commensurate with her role, and that he instilled a “toxic boy’s club culture.” And yet the company revealed in a filing with the Securities and Exchange Commission that Potdevin’s departure came with a lump sum payment of $3.35 million, in addition to $1.65 million that would be paid out in cash over 18 months.

The list of executives (usually men) who get the boot along with a huge wad of cash goes on. The late Roger Ailes left Fox News during a sexual harassment scandal with a $40 million exit package. Last summer, after Ford fired CEO Mark Field for leading the company into losing billions, Bloomberg reported the former VIP was still pocketing $57.5 million — and had use of the company’s corporate aircraft for a few months after his departure. In 2016, Barnes & Noble fired CEO Ron Boire for being bad at his job (“not a good fit” were the company’s exact words), and yet Boire was still handed a $4.8 million check. In 2015, former United Airlines CEO Jeff Smisek stepped down amidst a corruption probe, and still managed to become approximately $28.6 million richer.

Huge executive pay outs — known as “golden parachutes” — might seem appalling, but they are pretty standard for people so high up the food chain, explains Jeff Trexler, the associate director of Fordham Fashion Law Institute who’s also taught corporate and tax law. Golden parachutes became popular during the 1980s, when the decade saw an unusual amount of corporate mergers and acquisitions. New hires were concerned they’d get fired during future absorption periods, and so they wrote in provisions that protected them from walking away with nothing.

Since then, when executives get hired at companies, they come armed with lawyers who are eager to fight for compensation packages. Part of the trick to making sure VIPs get paid is to make the contract as specific as possible, Trexler explains.

“It’s basically jousting over boundaries,” he says. “A savvy lawyer will be able to narrow the set of circumstances that enable the company to get rid of the executive. Common things they throw in are felonies, embezzlement, fraud, being convicted of a crime. These are so specific so that anything else can be open to interpretation. Companies will often put in lines like, ‘the executives are required to work within ethical behavior,’ but what exactly does that mean?”

Trexler says company code of ethics are usually peppered with vague language, and so even instances involving harassment or discrimination are hard to battle. With this ambiguity, executives are able to net huge payouts when the time comes. And even if a company claims an executive is fired for cause, or that they violate a company code of conduct, “it doesn’t necessarily mean that cause was a grounds for termination in the contract,” Trexler adds.

Of course, there are companies with contracts that get specific about grounds for termination. Yet plenty of executives still walk away with a payout, Trexler notes, because it’s usually in the brand’s best interest to pay them off. For starters, giving an exec zero dollars could amount to scaring off future talent. Ousted executives can also make for some pretty bad enemies if they file a lawsuit for not getting their payout (and plenty do). During the litigation period of discovery, where each side can ask for internal documentation that’s scoured for evidence, companies would rather prefer to keep their skeletons hidden.

Lawsuits can also be very expensive — and very public — and so companies usually resort to paying off the exec in the hopes that they will just go away. Yes, this means someone who doesn’t necessarily merit a handout of several million is still getting it, but the alternative usually involves a PR crisis that is costly to the brand’s bottom line at best, and its reputation at worst.

“When you’re in litigation, you aren’t just playing to the judge — you’re playing to the public as well, and the executive is looking to pull up as much dirty laundry as possible,” Trexler says. “And they usually know where the bodies are buried, so companies would much rather pay someone to sign iron-clad non-disclosure and non-disparagement agreements.”

There’s also the fact that when most executives join a company, part of their contract involves stock options. They become a shareholder, and even when they are gone from a company, they’re given a voice at shareholder meetings. Such a relationship would prove to be a liability if a VIP with plenty of inside knowledge turns into a disgruntled ex (like ex-Lululemon CEO Chip Wilson, who took out bus stop ads in Vancouver to ridicule the brand last year after the board refused to answer his questions during a shareholders meeting).

Golden parachutes are deplorable for obvious reasons — dust off those “Eat the Rich” posters you made during the Occupy Wall Street movement — but Trexler notes that the pattern is largely what’s enabled powerful executives to rise to the top, regardless of their egregious behavior. Once an executive walks away from a company with a huge payout, with cause swept under the rug and no questions asked, he’s free to move on to the next company, where the bad behavior could potentially persist. And even though stories get out, Trexler says most brands will continue to hire the same people because “ultimately, companies are there for the bottom line.” It’s also what shareholders expect.

“This is part of the tragedy of the situation: There are plenty of companies willing to overlook someone’s bad history if they hear he has a track record of making money,” says Trexler. “Plenty of companies look at this in terms of a cost-benefit analysis, and sometimes paying off settlements is just another cost of doing business. It’s basic math, where the cost of harassment is just baked into the business plan.”

If there’s any positive outlook, it’s that the #MeToo movement might lead to a reduction of golden parachutes, Trexler believes. Workplace misconduct might have previously been deemed inappropriate policies around misconduct were still vague enough for a VIP to avoid facing consequences. Now, though, there is a case to be made that such news leaked to a public energized by #MeToo could be extremely dangerous to a company. Trexler says this could be used as leverage for company boards looking to get rid of problematic employees.

“If I were counsel for a company, and there was someone who needed to be disposed, I would latch onto the outrage that comes with #MeToo, and point out that it could create serious harm to the company if it gets out,” he says. “And I think there is now a stronger reason to minimize the payouts.”

It remains to be seen if golden parachutes will prevail. One thing is for certain, though, and that is that what’s been tolerable in the workplace is changing rapidly, and so we can certainly expect more CEO firings.