I’ll Take That Bet

Here’s a hypothetical for you: Suppose your company has the opportunity to hire a CEO on a medium-term contract (5 or 7 years) at a quite reasonable salary – less than you would expect to pay for a manager of his stature, and considerably less than he could get from a number of other offers. The only catch is, he wants a large severance payment in the contract, so that if you want to fire him early, it will cost you an extra $11 million to get rid of him. Would you accept that contract, knowing that in effect you are betting that the savings on his salary (and the money you will make by having him on your senior management team) will make up for the potential loss if you decide to fire him? Would your feelings about this change if his first three years in office were your best ever, with your highest revenue and lowest costs? If you did take this bet, would you still pitch a fit if he collected his $11 million “golden parachute” after his last year with your organization included a $149 million loss?

Well, you might want to talk it over with some of the people from the Massachusetts Blue Cross/Blue Shield organization, since that’s essentially what has just happened to them. You can get the story off of the Boston Herald web site if you’d like, but the basic story is that the CEO of the Massachusetts Blue Cross/Blue Shield stepped down at the end of last year because the Board was fretting about that year’s operating losses. Exacerbating the whole situation is the fact that the outgoing CEO’s predecessor received an even larger severance package in 2005 ($16.7 million, in fact) – and the fact that the organization is a non-profit…

Now, as I’ve previously noted, a non-profit is not the same thing as a charity. Being a non-profit organization does grant an organization several advantages under the law, most notably not having to pay taxes, but since a corporation only pays taxes on profits and a non-profit can’t have any profits, this isn’t as big a deal as you might think. In theory, all this should do is produce a leaner, more efficient corporation, since it can use 100% of its revenue to pay employees, buy equipment, and improve its services. Even more to the point, perhaps, in 2005 the most recent economic boom was in full swing, many people who should have known better were predicting nothing but peace and prosperity for the next thousand years, and the idea of spending $11 million on a CEO’s severance package seemed almost trivial, since a couple of college students could make that much in a weekend by starting a website. The move certainly wasn’t illegal, and it hardly seemed unethical (let alone “unconscionable”); at the time, it represented a savings of over $5 million from the previous CEO’s severance package…

The point I’m driving at is that all business decisions have to base the inherent risks of the situation against the payoff if your choice is successful. If your business environment is highly dynamic, long-term high-risk activities may not be a good idea; if your country or state are in the middle of an economic bubble that even a toddler could tell would not last forever (and might not last for seven years) then gambling on the stability of your senior management may not be your best choice. This is especially true in an industry like health insurance, which (like the securities, real estate, and airline industries before it) had been skating on thin ice while lobbying Congress to maintain its artificial industry conditions for decades before the deluge finally came. In the teeth of an economic crisis, a healthcare revolution, and an increasingly nasty political struggle for the future (if not the soul) of this country, having to publically admit that you bet $11 million on the performance of your new CEO and lost is a hard thing to carry off…

The question is, when you are given the same choice, somewhere in the future, will you take that bet, or play it safe and risk not getting those three banner years instead?