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The board of Philips has cancelled bonus payments for management after its stock fell 70 per cent.Getty Images/iStockphoto

Gus Carlson is a U.S.-based columnist for The Globe and Mail.

Members of the senior executive team at Philips haven’t been sleeping very well lately, even the ones who don’t rely on the company’s apnea-relief devices to hasten sweet dreams.

The nightmare that’s keeping them tossing and turning? The Dutch medical technology giant that makes everything from respirators, to toothbrushes, to razors said this week its senior management group would not be paid annual performance bonuses for 2022.

The corporate equivalent of public self-flagellation comes after a disastrous run that saw a global recall of respiratory devices that will cost Philips almost US$1-billion and crumpled the company’s market value by 70 per cent. It’s no surprise shareholders revolted, calling out management’s deep flaws and urging the board to act.

Somewhere in Philips’s somewhat Druidian no-bonus measure is an important lesson. While the move was driven by crisis, it takes a refreshingly responsible step toward redefining accountability and transparency in corporate governance, bucking the current trends of lax board oversight and a breathtakingly irresponsible tendency to reward poor management performance.

This is an age in which corporate boards are often slow to act during crises and rarely withhold bonus payouts, no matter how miserable the performance of management. So, many C-suiters happily swan around collecting big bonus packages, stepping through the ruins of their incompetence and often laying off thousands of workers in the name of efficiency and profitability.

Think about Walt Disney Co. DIS-N, and how its board watched idly as then chief executive officer Bob Chapek ran down the company financially and reputationally for two years before showing him the door late last year. Mr. Chapek collected bonuses of more than US$20-million for each of his two years of work, despite the fact he did a woefully subpar job. In fact, the Disney board approved pay increases for Mr. Chapek in each year of his short tenure.

Gus Carlson: Don’t complain about million-dollar CEO pay – focus on the real problem: boards

The management team waived its bonuses as part of an agreement with the board, but this is hardly an act of soulful corporate contrition. It is simple survival.

In conjunction with the no-bonus stance, Philips chief executive Roy Jakobs also announced layoffs and reorganizations of the company that will result in the elimination of more than 10,000 jobs over the next few years.

Mr. Jakobs clearly understands that to rebuild the company, everyone needs to share in the pain, including – and perhaps especially – the senior managers who got Philips mired in the gouda in the first place.

To be sure, executive compensation packages at Philips – a combination of salaries, cash bonuses and stock grants that vest over time – are modest compared with those at many other companies. The average executive compensation – salary and bonuses – is about US$230,000, according to Comparably, a corporate compensation tracking service. The highest executive package at Philips is US$650,000.

Some people might say that while the Philips move is good hygiene and sets an example for the corporate world, the company took too long to act. The trouble has been brewing for a while.

At the Philips annual meeting in the spring of 2022, shareholders voted to reject the company’s executive compensation plan to protest poor financial results and product recalls. The move came after Philips announced the previous month it was expanding its recalls and its share price was in free fall.

While the vote was non-binding, the board said it would take the signal seriously.

Ironically, the only person who seems to come out of the Philips disaster with a full wallet is former chief executive officer Frans van Houten, who will get his money even though he oversaw the product recalls that brought the company to its knees

Mr. van Houten has refused to waive his bonuses. He received a bonus of US$208,000 and will also take his shares grant. His total exit package, including pension and other payments, amounts to about $US5-million. Adding insult to injury, he will stay at Philips until April and will also receive an annual salary for this year.

Mr. van Houten’s exit package is nowhere near as large as Mr. Chapek’s, which was US$20.4-million. But together, the payouts serve as a stark reminder that if companies want shareholders to trust and believe in them, their boards and management teams need to re-examine how they conduct, evaluate and pay themselves.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 23/05/24 3:38pm EDT.

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DIS-N
Walt Disney Company
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