Love him or hate him, Adam Neumann, the founder of WeWork, has walked away with a whopping 1.7 billion dollar severance package, smashing the previous record of $417 million held by Jack Welch — the former CEO of General Electric.
As for WeWork, the company’s valuation continues to decline losing 80 percent over the last few months, causing the most important shareholder, Softbank, to enter full cost-cutting mode: the New York Times reported the company plans to lay off 30% to 50% of WeWork’s workforce —up to 6,000 employees — by the end of 2019.
WeWork’s valuation got ahead of itself because we’ve entered the euphoric stage of the business cycle, which creates an abundance of cheap money, and where there’s cheap money, you’ll find malinvestments.
The market is starting to expose crazy valuations and companies that only have the aim of “going public.” A phenomenon where you no longer need to build a successful, profitable business but instead create enough hype for investors to keep buying into your idea. To get rich quick in a market based on loose monetary policy, all you have to do is IPO your company, offload your stock when the lockup period expires, and run for the nearest exit — dealing with any backlash later.
At a glance, it may be confusing as to why any business, let alone WeWork, would pay out such an enormous amount of money to an ejected CEO, and especially to one who tried and failed to go public. Your initial judgments are probably along the lines of fairness, equality, and ethics: why are they handing out huge sums to ex-employees over current employees? But as outsiders in this scenario, it’s easy for us to rush to the conclusion that they are rewarding poor management instead of rewarding faithful employees.
In reality, severance packages are anything but a bonus or a way of saying thanks for all the hard work. They are, in fact, a damage control tool: a bribe to brush over the range of complex issues created by firing a high ranking employee.
With a public company like Softbank facing so much scrutiny, $1.7 billion will be a small price to pay to protect the company’s reputation and image as opposed to what would happen if Neumann remained as CEO. Despite the rapid devaluation of WeWork, it remains a solid part of Softbank’s Vision Fund portfolio, and if a CEO is costing the company millions — or in WeWork’s case billions — then paying them a small fortune for a quick dismissal is a sound business strategy.
Severance packages offered by companies in crisis create a bizarre dynamic: the more damage a CEO does, the more they get paid.
If there’s one thing Hollywood gets right, it’s severance negotiation in the boardroom. When a corporation is in full damage control and an employee has access to potentially damming inside information, such as dodgy filings or financial accounts, the company can literally offer hush money in exchange for a nondisclosure. So when you compile the speculation from journalists and insiders about WeWork’s questionable figures, it makes sense why many believe Neumann has signed nondisclosures that would contribute to the size of his severance package.
Employment law is another major threat to a company: If a CEO feels at all hard done by then there’s a chance of an impending lawsuit, and it could take weeks, maybe months, to resolve with the CEO still in their position. This could cost a company millions not just because of litigation costs but generally what the CEO is doing to make a company unprofitable. Whether that's due to a failing business strategy or a loss of confidence from shareholders, a potential lawsuit is a nightmare scenario for any board, especially for companies like WeWork, creating a big incentive to offer a significant payout.
In the end, it’s not about equality, fairness, and ethics: it’s all about damage limitation at whatever the moral cost. When the health of a company like WeWork is under stress the board is only thinking about one thing: the financial ramifications of keeping the CEO in their position. Neumann’s gigantic payout shows just how crazy the world of venture capital is right now as severance packages offered by companies in crisis create a bizarre dynamic: the more damage a CEO does to a company, the more that CEO gets paid.