Big Losses, Bigger Paychecks

November 19th, 2012

Megan McArdle tries to explain why executives at failing companies often receive large amounts of compensation:

Again, you may be tempted to say, “Good riddance!” But you have perhaps not considered the problem of who you will get to replace them. Getting people to stay on a sinking ship may be challenging, but it is nothing compared to the task of getting them to leap off a safe vessel and onto your wildly pitching decks. People who have worked for the firm have non-cash reasons to stay: they know the people and the routines. People who don’t work for the firm have all those reasons not to join you–unless they are so incompetent that no one else will hire them. So keeping a tight lid on management pay during a turnaround makes it likely that you will lose your good people and have to replace them with someone else’s bad people. This is not a recipe for a good turnaround.