Warren Buffett put it best when he noted:

… getting fired can produce a particularly bountiful payday for a CEO. He can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Today, in the executive suite, the all-too prevalent rule is nothing succeeds like failure.

Buffett’s point has been eloquently proved in recent times following the termination (or “forced retirement”) of Merrill Lynch’s Stanley O’Neal and Citigroup’s Charles Prince.

O’Neal’s was a true American rags-to-riches tale. The African-American son of a factory worker grew up in poverty, attended Harvard and rose to become CEO of one of the world’s largest brokerages. While O’Neal’s tenure at Merrill was initially successful he stepped down after it was announced that the company would lose US$7.9 billion relating to investments in sub-prime mortgage backed securities. Merrill’s share price is around $US55 per share – less than it was in mid-2003 after O’Neal became CEO.

Despite O’Neal failing to add any significant value during his tenure (Merrill Lynch has underperformed the Dow since 2003), he will leave with benefits of US$160 million (comprising stock, options and pension benefits). As a final kick in the guts for Merrill shareholders, O’Neal will be entitled to an office and executive assistant for the next three years. O’Neal’s package neatly shows the problem of paying executives short-term bonuses when their long-term effect on the company may not necessarily be positive.

Over at Citigroup, CEO Charles Prince fell on his sword over the weekend as the company announced write-downs of more than US$11 billion – with possibly more to come. Like former CEO Sandy Weill, Prince was an executive of Travelers Group (which merged into Citi in 1998). Since Prince became CEO of Citi in October 2003, Citigroup shares dropped from around 17 per cent – during that period, the Dow increased by approximately 40 percent. That is a pretty substantial underperformance.

For his trouble, the New York Times estimated that Prince will depart leaving Citi with a minimum of US$147 million (and possibly more, if Prince’s stock options, which currently have no value due to Citi’s poor share price, appreciate).

The real villain isn’t necessarily the CEOs themselves, but rather, the boards and remunerations committees who approve the ghastly contracts and the idiotic remuneration consultants who devise them. Ironically, the lead story in today’s AFR was “Boards seek share rise in Directors fees”.