Speaker 1: Bloomberg Audio Studios, podcasts, radio news. If you've been anywhere
Speaker 1: on the Internet recently, you've probably seen the same viral
Speaker 1: video I have. It's a closeup of a man and
Speaker 1: a woman embracing up on the JumboTron at a Coldplay concert.
Speaker 1: When they find out they're on screen, they panic.
Speaker 2: Or show.
Speaker 1: It was an awkward moment. Once the clip started gaining
Speaker 1: traction online, internet flews discovered it was in fact an affair,
Speaker 1: and they also discovered another awkward ringle. The woman in
Speaker 1: the video was the chief people officer at a data
Speaker 1: technology company called Astronomer, and the man in the video
Speaker 1: was Astronomer's CEO. Well after that video blew up the
Speaker 1: former CEO, just days later, the board accepted the CEO's
Speaker 1: resignation and installed an interim chief.
Speaker 2: In light of the amazingly unique and wild circumstances of
Speaker 2: him being caught with his HR chief at the Coldplay concert,
Speaker 2: he was summarily dismissed.
Speaker 1: Matthew Boyle, Bloomberg's Management and work reporter, says the Astronomer
Speaker 1: leader's ouster might be uniquely dramatic, but it's just the
Speaker 1: latest in a series of CEO departures, terminations, and resignations
Speaker 1: that Bloomberg has been tracking.
Speaker 2: Last year saw a record number of CEOs who not
Speaker 2: just departed big public US companies, but by our determination
Speaker 2: and the determination of an outside expert, were ousted, were
Speaker 2: essentially forced out.
Speaker 1: Matthew's teams spoke with academics, corporate lawyers, executive search advisors,
Speaker 1: and public relations experts, and partnered with compensation consulting firm
Speaker 1: Ferry and Advisors to analyze CEO departures at some of
Speaker 1: the world's biggest companies.
Speaker 2: There were one hundred and thirty four forceouts in twenty
Speaker 2: twenty four, including some very big companies we all know.
Speaker 2: Nike was one. Just do It, the world's largest athletic
Speaker 2: clothing company, is doing a leadership change. Starbucks was another.
Speaker 2: Starbucks shook the restaurant industry by replacing CEO Laxman Narrisimhand
Speaker 2: with Brian Nickel. Intel, CEO of Intel is out, Petco,
Speaker 2: Victoria's Secret Peloton. These are all companies that decided that
Speaker 2: they were not happy with their current CEO, and the
Speaker 2: question I was seeking to answer was what is this costs?
Speaker 1: The answer a whole lot variant found that to force
Speaker 1: out these CEOs, companies paid a median of three point
Speaker 1: one million dollars in cash, and for companies paying equity,
Speaker 1: a median of six point two million dollars.
Speaker 2: What is this cost to get rid of the CEO
Speaker 2: you don't like? What does it cost to recruit the
Speaker 2: new savior CEO who you really do want? What about
Speaker 2: the lawyers and the PR people, and what about the
Speaker 2: search firms that look for the new CEO? What happens
Speaker 2: even to employee productivity?
Speaker 1: For Astronomer, It's hard to tally the true cost of
Speaker 1: the CEO's departure, in part because the company is private,
Speaker 1: but it's damage control campaign can't have been cheap.
Speaker 2: Hi, I'm Gwyneth Paltrow.
Speaker 1: I've the company hired a crisis PR firm and put
Speaker 1: out a video starring Gwyneth Paltrow, who just happens to
Speaker 1: be the ex wife of Coldplay frontman Chris Martin.
Speaker 2: Thank you for interest in Astronomer.
Speaker 1: We reached out to Paltrow's representatives and her company Goop
Speaker 1: to find out what she made for the ad spot.
Speaker 1: As of this recording, we haven't heard back, but her
Speaker 1: biographer told Us Weekly that t was likely paid millions
Speaker 1: based on previous appearances millions for a one minute ad.
Speaker 1: I'm Sarah Holder, and this is the big take from
Speaker 1: Bloomberg News Today on the show, why it's so expensive
Speaker 1: to replace the CEO and how those costs down to
Speaker 1: the rest of us. It probably won't surprise you to
Speaker 1: hear that American CEOs get paid a lot. Last year,
Speaker 1: media and compensation for the one hundred highest paid CEOs
Speaker 1: at public companies was nearly thirty one million dollars, according
Speaker 1: to the pay consultant Equilar. The high pay also comes
Speaker 1: with higher pressure to perform, and Bloomberg's Management and Work
Speaker 1: reporter Matthew Boyle says last year a surprising number of
Speaker 1: CEOs were shown the exit twenty.
Speaker 2: Twenty four was a record figure. And is that because
Speaker 2: there is more scrutiny on CEOs these days, not just
Speaker 2: around maybe performance, but around, you know, what they're saying
Speaker 2: on perhaps other issues. I think there's also been a
Speaker 2: rush of CEOs to either leave voluntarily or involuntarily, because
Speaker 2: during COVID, a lot of CEOs stuck around just saying,
Speaker 2: I'm just going to get our company through COVID. Let's
Speaker 2: just get through COVID and now it's time to hang
Speaker 2: it up. Or they got their company through COVID and
Speaker 2: now they look at Trump two point zero and they say, oh,
Speaker 2: my goodness, I can't handle this as well. But also
Speaker 2: a lot of these are just performance issues. I mean
Speaker 2: they are underperforming. They were either chosen poorly or they
Speaker 2: were not the right person at the right time. And
Speaker 2: so when we saw that number one hundred and thirty four,
Speaker 2: we said, my goodness, we need to take a look
Speaker 2: at what's going on here. And twenty twenty five, the
Speaker 2: current year, we're also on pace for a new record
Speaker 2: as well in terms of the number of CEOs ousted already, yes,
Speaker 2: already for the half year, so it could be another
Speaker 2: record year.
Speaker 1: Actually, well, let's start to break down some of the
Speaker 1: costs that you dug into. First, there's the cost of
Speaker 1: just getting rid of someone for cause, not for cause.
Speaker 1: How are those kinds of payments structured.
Speaker 2: Usually it's a set of payments where sometimes they will
Speaker 2: pay their salary for the remainder of the year, even
Speaker 2: for an additional year some type of cash bonus. So
Speaker 2: let's say he was there for half of the fiscal
Speaker 2: year and then was terminated, he might still get a
Speaker 2: bonus for that year, which makes you kind of scratch
Speaker 2: your head, what wait, you fired him, Why is he
Speaker 2: or she getting a bonus?
Speaker 1: Pro rated bonus is kind of crazy.
Speaker 2: Yeah again, rules are different for CEOs, so they're going
Speaker 2: to get some type of pro rated bonus for the
Speaker 2: for the current year. But then where it gets really
Speaker 2: interesting and the numbers start to get really bigger is
Speaker 2: the equity. And these could be in the form and
Speaker 2: I know these terms are arcane, but restricted stock units,
Speaker 2: performance stock units RSUs, PSUs, stock options as well. There's
Speaker 2: a million different flavors of equity and the basic way
Speaker 2: to break it down is some of them you'll just
Speaker 2: get for hanging around. They're time based, you know, they
Speaker 2: will eventually vest over time. Some of them are performance based.
Speaker 2: They're tied to some sort of metric that you do
Speaker 2: have to hit. But my point is when these CEOs
Speaker 2: are terminated again, in three quarters of the companies we
Speaker 2: looked at, there was some sort of accelerated vesting, which
Speaker 2: means those shares that you were going to have to
Speaker 2: wait five years for they're all yours now. For example,
Speaker 2: the Starbucks CEO, we still don't know the final value
Speaker 2: of his severance because it is based on pro rated
Speaker 2: payments that are tied to the company's current fiscal year
Speaker 2: and next fiscal year. He might get paid something for
Speaker 2: the performance of Starbucks, like two years after he left.
Speaker 1: Can you say more about the ousted Starbucks CEO? Was
Speaker 1: his pay package and his exit package on the high side.
Speaker 2: It was on the high side and in both cases,
Speaker 2: and by that I mean the severance of Laxman Harasimam
Speaker 2: was extraordinarily high among the companies we looked at, and
Speaker 2: the payment to the incoming CEO, Brian Nickel was one
Speaker 2: of the highest we have ever seen. He got ninety
Speaker 2: million dollars, ten million dollars and sign on payments and
Speaker 2: eighty million dollars in equity just for coming in the door.
Speaker 2: And that gets into this whole area of what we
Speaker 2: call make whole payments. The reason that number is so
Speaker 2: big is because Brian Nicol was doing a very very
Speaker 2: good job at his previous employer, Chippotle, and he was
Speaker 2: getting this money at Chippotle for extraordinarily good performance. So Starbucks,
Speaker 2: in order to wrench him out of Chipotle, basically had
Speaker 2: to say we have to match that.
Speaker 1: In a statement, A Starbucks spokesperson told Bloomberg, we brought
Speaker 1: in a proven leader with a strong track record to
Speaker 1: set Starbucks up for success and create long term value
Speaker 1: for all stakeholders. He's backed by an experienced team, and
Speaker 1: much of his compensation is tied to future financial performance.
Speaker 1: Let's talk about maybe a more average company trying to
Speaker 1: poach a new CEO or a new CEO. What are
Speaker 1: some of the typical costs that go into that.
Speaker 2: For a more typical CEO, you're usually hiring a search firm.
Speaker 2: Corn Ferry and Spencer Stewart are two of the better
Speaker 2: known ones. You are going to pay that search firm, though,
Speaker 2: usually one third of the new CEO's first year payments
Speaker 2: first year compensation, and that could be a million bucks.
Speaker 2: It could be up to five million dollars in some cases,
Speaker 2: so it is not chump change. But that's only the beginning.
Speaker 2: There are compensation consultants, and then you have all these
Speaker 2: other advisors. You need to pay PR consultants to sort
Speaker 2: of spin the departure because this has to be spun.
Speaker 2: Lawyers as well. PR people. Really good ones can cost
Speaker 2: one thousand dollars an hour. Really good lawyers can cost
Speaker 2: two thousand dollars an hour to negotiate all the disclosures
Speaker 2: and filings you have to do to negotiate and hammer
Speaker 2: out the contract for the outgoing CEO and the incoming CEO.
Speaker 1: You know, the Astronomer team hired the crisis PR firm
Speaker 1: behind Blake Lively's PR.
Speaker 2: Can't probably not an expense they were expecting to have
Speaker 2: in their twenty twenty five fiscal year. But here we are.
Speaker 2: But one big cost that I didn't expect when I
Speaker 2: started doing reporting, but that does come into play is
Speaker 2: that the new CEO is probably going to want other
Speaker 2: new people around him or her. So what we often
Speaker 2: see is that what we call the c suite, the
Speaker 2: executive leadership of a company will usually have other departures
Speaker 2: and arrivals after the new CEO comes in. So Starbucks
Speaker 2: brought in a new CFO, Chief Financial Officer, Kathy Smith,
Speaker 2: highly regarded CFO. She received eleven point four million to
Speaker 2: come on board again, just her sign on and what
Speaker 2: we call the make whole payments. Because she was earning
Speaker 2: a lot at her last job. You got to pay
Speaker 2: the piper to get her into this new job. So
Speaker 2: Starbucks wanted her though Brian Nickel wanted her. That's what
Speaker 2: she got, and.
Speaker 1: Then they had to push out the old CFO.
Speaker 2: You say bye bye to that person. Guess what that's
Speaker 2: a seference cost. And meanwhile, the other executives at the
Speaker 2: company are getting very nervous because a new CEO is
Speaker 2: coming in and they're worried. And there's usually some type
Speaker 2: of interregnum period where there is no CEO, certain executives
Speaker 2: are brought on as what we call an interim CEO.
Speaker 2: Let's say you take the chief operating officer and say,
Speaker 2: you know, look, look Laura, we just need you for
Speaker 2: six months just to like steer the ship, keep the
Speaker 2: trains running on time, and we're going to give you
Speaker 2: one point two million dollars as a retention bonus.
Speaker 1: Sounds pretty good, not a bad.
Speaker 2: Deal, Yeah, And sometimes they backfire because the executives who
Speaker 2: get paid the bonuses are not retained. They leave either
Speaker 2: voluntarily or involuntarily. Later, more severance, more recruitment costs. It
Speaker 2: just keeps adding and adding, which was just so fascinating
Speaker 2: to me. I was like, my god, when does this
Speaker 2: ever end.
Speaker 1: So that's how the costs to push out a CEO
Speaker 1: can spiral. But how does all this tummult impact all
Speaker 1: the people who work at and invest in these companies?
Speaker 1: That's after the break. It sounds like everyone in the
Speaker 1: c suite makes money when CEOs are replaced, the outgoing CEO,
Speaker 1: the incoming CEO, other executives, But for everyone else, dealing
Speaker 1: with a leadership transition can be stressful. You might have
Speaker 1: a new boss, Your boss might have a new boss.
Speaker 1: I asked Bloomberg's Management and Work reporter Matthew Boyle how
Speaker 1: the drama associated with the CEO leaving can impact all
Speaker 1: the other people left working at the company.
Speaker 2: People get very nervous. Am I going to have a
Speaker 2: new boss? Am I going to have a new job?
Speaker 2: Is there going to be a layoff? Are they going
Speaker 2: to bring in the McKinsey consultants and start to do
Speaker 2: some big sort of strategy overhaul?
Speaker 1: Are we taking things in a different direction?
Speaker 2: Exactly? Exactly, so, you certainly are going to have a
Speaker 2: hit to productivity and possibly an increase in your voluntary
Speaker 2: turnover when you have a CEO changeover like this.
Speaker 1: Well, there's a final category of costs that we haven't
Speaker 1: talked about yet, which is shareholder value. If you boot
Speaker 1: your CEO your stock can drop. Obviously, the hope is
Speaker 1: that you're going to turn things around. The stocks will
Speaker 1: rise eventually. Changing leadership will reasure investors. But what did
Speaker 1: you find when you looked at the hit to stock
Speaker 1: price during these transition periods and in the periods thereafter.
Speaker 2: The day Brian Nicol was announced as the new CEO,
Speaker 2: the stock jumped. It was like, oh, my goodness, they
Speaker 2: found this rock star. The shares rose twenty three some
Speaker 2: odd percent.
Speaker 1: We're going to be Chipotle exactly.
Speaker 2: Everything's awesome. What was lost in that analysis The shares
Speaker 2: had fallen twenty five percent in the twelve months leading
Speaker 2: up to that. So guess what, it's a wash. So
Speaker 2: you have to look at the full period, not just
Speaker 2: the one day stock jump on the day that the
Speaker 2: new savior CEO is announced.
Speaker 1: There hasn't been much research looking deeply at this question.
Speaker 1: The last data Matthew could find comes from a twenty
Speaker 1: fifteen study by PwC, which analyzed CEO transitions at twenty
Speaker 1: five hundred companies across three years. By looking at the
Speaker 1: median shareholder returns in the year before and after a
Speaker 1: CEO changeup, PwC estimated for the world's largest public companies.
Speaker 1: These kinds of force turnovers cost one point eight billion
Speaker 1: dollars in shareholder value, and that was ten years ago.
Speaker 2: So that is the hit to shareholders, and it really
Speaker 2: speaks to a company should do a better job of
Speaker 2: you know. This is what it all gets to is
Speaker 2: corporate governance and succession planning, and companies need to do
Speaker 2: a much better job of They spend millions on these
Speaker 2: search firms and on succession planning and building up what
Speaker 2: they call their bench, you know, their managers below the CEO,
Speaker 2: who could one day run the show. But oftentimes, as
Speaker 2: we've seen here obviously, with a record number of ousters
Speaker 2: and all these costs flying around, they're not doing a
Speaker 2: very good job of it at the moment. So, you know,
Speaker 2: and that's on the blame goes to the companies, and
Speaker 2: it certainly goes to boards boards of directors as well.
Speaker 1: Are there any examples of companies that have managed to
Speaker 1: replace their CEO in a more cost effective, less disruptive
Speaker 1: way this year? I'm thinking about Warren Buffett actually.
Speaker 2: For example, Yes, I mean, Buffett as usual is an
Speaker 2: icon here and we've all known for years and years.
Speaker 2: It was a bit of a horse race or parlor game.
Speaker 2: You know who was going to be the successor, and
Speaker 2: in the end choosing able right a very smart choice.
Speaker 2: I mean it got resoundingly positive feedback because I think
Speaker 2: Warren had the benefit of time. He is Berkshire Hathaway.
Speaker 2: There was no activist investor banging on the door saying
Speaker 2: we need to know the new who's going to replace
Speaker 2: Warren within six months, or we're going to you know, uh,
Speaker 2: the trust we're going to raise out exactly. He has
Speaker 2: such a reservoir of trust. Few companies have that reservoir
Speaker 2: of trust, I would say in American business right now.
Speaker 1: This is perhaps an obvious question, but if companies are
Speaker 1: spending all this money on CEO transitions, what aren't they
Speaker 1: spending it on. Does this come at the expense of
Speaker 1: employee salaries, investing in new products? How do companies make those.
Speaker 2: It's a really good question, and I think it comes
Speaker 2: at the expense of a lot of different things. If
Speaker 2: you're paying out all this money to the CEO, you
Speaker 2: might not be paying enough for your CFO and the
Speaker 2: other executives. It's certainly kind of coming to cost of
Speaker 2: paying your rank and file employees as well, maybe you're
Speaker 2: cutting the training budget what we call the learning and
Speaker 2: development budgets, so there won't be as many opportunities for
Speaker 2: employees to learn new skills. Let's say in an age
Speaker 2: of AI that's more important than ever. But you're also
Speaker 2: made the good point business opportunities missed when you have
Speaker 2: no CEO or you're looking for a new one. I
Speaker 2: think there are certainly, and many of the people I
Speaker 2: talked to for the story said there is an opportunity
Speaker 2: cost there. You're not launching that new product, you're not
Speaker 2: entering a new market, You're missing out on a potential
Speaker 2: M and a deal you know that would have transformed
Speaker 2: the company. But you are so consumed with this CEO
Speaker 2: changeover that you have blinders on.
Speaker 1: One of the takeaways that I think you've really highlighted
Speaker 1: is it seems like CEOs always make a lot of money,
Speaker 1: even if they screw things up or cost the scandal.
Speaker 1: Is that fair? Like, do CEOs always fail up to
Speaker 1: the tune of millions of dollars?
Speaker 2: Yeah? I mean, I mean there's no other way to
Speaker 2: answer that but to say, yes, they get paid on
Speaker 2: goodly sums. We know CEO pay is just increasing all
Speaker 2: the time. It's like hockey stick growth. So given that
Speaker 2: a lot of these payments are usually based on what
Speaker 2: the CEOs are earning in a given year, we certainly
Speaker 2: know that the cost to get rid of a CEO
Speaker 2: is only increasing. There's no way these things ever go
Speaker 2: down unless you know, CEO pay does not go down.
Speaker 2: The cost of making a mistake with hiring a CEO
Speaker 2: is not going to go down. I mean. An interesting
Speaker 2: thing that's in proxy statements now is what they call
Speaker 2: the CEO pay ratio, where they have to say what
Speaker 2: does the CEO may compare to the media and employee.
Speaker 2: Some of these ratios are like six hundred to one,
Speaker 2: and I know that raises much bigger questions about you know,
Speaker 2: the American worker and wages and unions, you know, and
Speaker 2: all that, But it really just shows that CEO pay
Speaker 2: has been stratospheric for years, and anytime they try to
Speaker 2: rein it in, one of the unintended consequences is they've
Speaker 2: find other workarounds and loopholes and ways to pay them more.
Speaker 2: But whoever is paid, they're going to be getting plenty
Speaker 2: of money. Yes, that's the common denominor here.
Speaker 1: Well, Matthew, thank you so much. This is a great conversation.
Speaker 2: Sure, thanks so much for having me.
Speaker 1: This is the Big Take from Bloomberg News. I'm Sarah Holder.
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