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