Thursday, 26 February 2009
Robert Peston has another example of an economic decision which looks odd from a simplistic rational point of view, but makes perfect sense when perceptions and expectations are taken into account.
Firing someone often makes an important statement about the direction of a company. But (as most of us would certainly wish) it's difficult for a company to fire people at will. Thus, companies usually have to pay off the individual - whether with a pension or a lump sum.
For a company the size of RBS, a £16 million payoff (or whichever part of this was actually discretionary) is easily worth the improvement in public image that comes with such a major break. Of course the payoff itself - since it inevitably has to be made public - has a perception impact, but that's probably much smaller than the damage of keeping the same person in charge.
Would you argue that Goodwin's actions were egregious enough to justify sacking without compensation? Most people have made judgment calls at work which caused substantial losses, though they are rarely as visible and hardly ever as expensive as Goodwin's. We tend not to run the counterfactuals over most of our work to see what opportunities we have missed or mistakes we've made.
Perhaps in future, CEOs will be more likely to have "at-will" style contracts where they waive their rights to compensation in advance. But it's a little pointless to argue that we should have had them in place ten years ago.