When an executive leaves a company following the release of disappointing results or mismanagement, the payment of a golden parachute (a generous severance package) is often seen as rewarding the executive for failure, sparking the ire of shareholders and the public alike. More problematic is the practice of granting lucrative golden parachutes to executives who resign in order to accept a high-ranking appointment in the government. A recent article in the Financial Times explains how some banking executives receive generous payments upon entering into public service in the United States, payments they would not have been entitled to had they joined any other employer. For example, Jack Lew, who became head of the US Treasury in 2013, was permitted to retain all of his incentive rewards upon leaving Citigroup, a benefit which is uncommon for employees with unvested incentives. His new counsellor, Antonio Weiss, received $21 million upon leaving Lazard for his government position.
Instead of being called golden parachutes, these payments would be more aptly coined “golden handcuffs”. The phrase golden handcuffs usually refers to incentives used to tie an executive to a company and prevent them from joining a competitor. However, in this case, the handcuffs work by incentivizing the employee to leave the company for a position of influence in the government, and to then use that influence for the betterment of the company. Though no longer an employee of the company, the executive remains tied to it out of a sense of obligation and indebtedness, and may be inclined to repay the company in political favours. We must seriously question whether handcuffed civil servants are truly engaged in “public” service once they have been paid millions of dollars by their previous employers, or whether this payment ensures the civil servant’s support in the policy making process.
Even more problematic is the limited requirement to disclose these payments. Corporate governance standards only require disclosure of an individual’s remuneration if the recipient of the payment is the CEO, CFO or one of the top three earners in the company. Thus, unless the departing employee happens to be one of these individuals, or is subject to a confirmation hearing where he is directly asked about his remuneration, the public will never know whether he has been “handcuffed.”
AFL-CIO recently tabled a proposal at Citigroup’s annual general meeting which would have required Citigroup to disclose any golden parachutes paid out to employees entering government service. Unfortunately, this proposal only received 26.4% of votes in its favour. This result is not particularly surprising. Shareholders are not trustees of our democratic institutions. Most self-interested shareholders would support corporate actions that ensure a favourable political environment for their investments.
Instead, government action is needed to disallow payments to incoming government employees, or to at least require their disclosure. Companies should be prohibited from making payments to employees bound for government positions if those payments are different from what the employee would have been entitled to had he left for a position with any other company. Public servants should not be handcuffed to their former employers, and if they are, we should at least know about it.