Friday, March 20, 2009

Time to Rethink Compensation

You might have seen or heard some of the headlines about outrageous bonuses being paid to executives of companies that the taxpayers have bailed out and all the outrage this has caused. I'd be surprised if you have managed to avoid this with all that is going on at AIG and FannyMae and FreddyMac on the way, but they certainly don't have a corner on the market for outrageous bonuses.

In the last couple of decades the CEO and other top level executives have become the star athletes of the business world. Do you remember some years back how professional athletes salaries skyrocketed. I don't know that I can pin it all on one athlete but Dave Winfield sticks in my mind, putting some context behind the contract he had with the New York Yankees, he made on average of $600 everytime he went to the plate, regardless of if he hit a homerun, got on base, or just plain struck out. While many of the professional athletes contracts did have various incentives for the players to perform well, many didn't, and some would argue that the contracts have helped put many professional clubs on the verge of bankruptcy (especially in the smaller markets). It could be argued that the star players put the fans in the stands (of course this really needs to be seen) and that they bring championships and better play by their teams (all with no guarantee, there are tons of stories out there about the prima dona athletes that are more trouble than their worth and the ones that have been injured or just don't pan out). Getting back to executive pay, many are paid high salaries (especially compared to the money that a average employee takes home) and given bonuses that aren't really based on performance or at least seem to be encouraging performance that hurts the company and the economy in general.

With the AIG bonuses, the argument has been made that the company was legally bound to pay the bonuses, but companies are always changing the rules and making it harder for their rank and file employees to see any more real compensation, so why does AIG have to pay those bonuses? I can see paying some of the bonuses where "real" targets where made and met, but you have to wonder how many of those bonuses would actually fit into this category? As far as being legally bound to pay the bonuses, many companies don't seem to have any problem using creative accounting or other games to tell their average employees that their is no profit (or their isn't enough) , so they're be no profit sharing (or canceling incentive programs altogether), so why would AIG have a problem in not paying the bonuses or scaling them back. Why not have those executives put a little more skin in the game. One member of congress suggested that the bonuses could be made double of nothing, so when AIG is profitable and has paid back the government, it could double the bonuses that are currently scheduled, certainly it would help to scale back some of the public outrage.

A point that seems to be lost on a lot of executives is that they live in a world far removed from their employees and the average taxpayer (and maybe even many of their clients and customers) and many don't seem care about anyone but themselves any longer. I'm reminded of how Marie Antonette was told that the French people were starving and didn't have any bread and she said "well, let them eat cake". The story goes that she was far removed from the public and didn't realize that the public didn't have the option of eating cake instead, that they really didn't have enough money to buy bread. Many people have lost their jobs in the last few months or are in fear of losing their jobs and many people have lost their homes or are on the verge of losing them, you can see why people with multiple homes might think well, they can just buy a new one now can't they. It kind of makes you wish that some of those executives would do a "Trading Places" ala Dan Akroid and Eddy Murphy, to appreciate what everyone else is going through.

The CEO of a well known IT company decided that they needed to respond to the weakening economy and a drop in profits in the last quarter, he said that he would take a 20% pay cut and was going to "request" that employees took paycuts ranging from 2.5% to 5%. When you look closer at the cut the CEO is going to take, he'll reduce his base salary by 20%, but he'll still get all his other bonuses and perks, resulting in less than 1% drop in pay and if enough of the regular employees accept this "voluntary" pay cut, he would likely seen some bonus for this. For the average employee, there are no other bonuses to be added to their compensation, so a 5% or 2.5% drop in pay is just that. Also to be noted is that this CEO saw his pay rise 68% from 2007 to 2008, you know that most of the regular employees didn't see anything near that. This CEO saw $42,514,524 in total compensation in 2008 (yes that is 42 million). He exercised $10 million worth of stock options and $15.7 million worth of company stock vested during 2008. He received $256,000 for personal and home security, use of the company jet was valued at $135,734, and there was $71,000 in mortgage subsidy he is guaranteed for relocation expenses. This company also bought another company last year, so as part of the integration going on now, there are and will be a lot of job loses at the company they bought (many of the jobs being moved to India, China, and other lower labor cost countries), which was healthy at the time of purchase and made a profit in the last quarter (this company that they bought actually improved the company's overall figure in that quarter). 6 people at the top of this company's executive leadership received $142,774,325 in compensation in 2008. Doesn't that seem a tad bit out of whack?

From the same company, I've heard that they're planning to cut pension contributions. If companies are cutting (or eliminating) pension contributions, employees are making less money (less money is going into social security, reducing future payment eligibility), an unbelievable amount of money in 401ks has been lost, and the employees (who manage to keep jobs) don't have a chance to really build any kind of retirement. You have to ask, how on earth are these people going to be able to retire?

I had a professor at school that said that one day it would be entirely possible to build cars with robots, but who would have the money to buy the cars then. While there currently are a lot of robots used, it seems that companies are going more and more in the direction of replacing higher paid workers with people in lower labor cost countries, so the once higher paying jobs are disappearing in alarming numbers and you don't really see jobs popping up that pay anywhere near the jobs that were lost.

When all the money stays at the top of the food chain with company executives, how much of that really makes it way back into the economy and into taxes? People in these kind of tax brackets tend to save more and use accountants to avoid or limit tax exposure. In general, these people aren't putting that much back into the economy with their money. When the money flows down to the regular employees, they're able to make their mortgage payments, are likely to spend the money on their necessities and consumer goods (read, put more money into the economy) and some money is likely to make its way back to the government in the form of additional taxes.

Once upon a time, America (and much of the developed world) took pride in developing a growing middle class. In post World War II period and especially since the end of the Cold War, we've seen the world economies being driven by the consumer. There are more and more products produced that are bought by the consumer. When the consumers don't have jobs or don't have a lot of money to spend, many of the markets for products will eventually dry up. Many of the emerging markets aren't as materialistic and aren't as likely to buy all the consumer goods that were bought in the past (read selection will greatly decline with entire industries disappearing). You have to ask, what is wrong with a middle class that can afford to live above the poverty line and actually spend money (driving the economy)?

Henry Ford is reported to have wanted his employees to be able to make a living wage. It seems that that this isn't shared by much of management today. Employees tend to be looked as as a liability instead of the asset that they should be. People tend to look after there basic security first (shelter, food, and other basics), when people are so worried about living paycheck to paycheck (as so many are now a days) they don't tend to be as productive and creative as they are when they don't have to worry about their basic security. Management is so focused on cutting costs, that they don't see that their employees are often full of good ideas and probably know lots of ways that things could be done better or about new services that your company might be able to offer that would make it more competitive. As more and more people are unemployeed or forced to accept pay cut after pay cut, you have to think about the possibility of "the people" being more ripe for sabotage, revolution, and other things that might have seemed crazy in the past.

Since so many of the big companies around today aren't being run by the people/families that started them, and most of the top executives are more like guns for hire, then really tied to their companies, the entrepreneur spirt of the founders is gone as is their tie to the company. When you own the company, the company's long-term longevity, prosperity, and success tend to be more centered in all that you do, while the hired guns are often looking only to reap that big bonus before moving on to the next gig and it doesn't matter if the company falls apart after they leave or if the company gets taken over and dismantled, they didn't create it and don't have that bond.

Let us issue a call to action to all the corporate boards and top executives out there...
  • No more bonuses for dismantling the company's workforce. If more than 1% is made redundant, there should be no bonus paid to anyone for this.
  • No more bonuses paid to top executives when the company loses money. Full stop
  • No more bonuses paid that encourage the emphasis on the short-term to the determent of the company's long run viability and competitiveness (especially all the focus on extreme cost cutting)
  • No more golden parachutes. We've all seen executives leave with huge payouts only leaving carcasses of once strong companies behind
  • If management is going to degrade benefits being offered and paid to employees, they must be willing to accept this themselves at levels that correspond to that faced by average employees. If you're going to cut retirement or health care coverage, then executives should have to try to live with corresponding coverage and see if they can truly accept that
  • If management is going to reduce pay of employees, it should be as a last resort and not because profits weren't as high as they would have liked in the last quarter. Management should be willing to take pay cuts that match or exceed the regular employees are being asked to do and not the smoke and mirrors suggested above that resulted in less than a 1% pay cut for the CEO
  • Return to a long term vision for the company and not the quarter to quarter focus we have now
  • Look at ways to grow the company instead of shrinking it. Look for other vertical, horizontal, and out of the box directions that you can take the company. Look past the trends that are in your face and look for further emerging trends. There is lots of opportunity out there if leadership can only look for it.
  • Be good corporate citizens and look after the areas that you do business and think about giving back, maybe in areas where you don't now do business
  • Remember that the employees are an asset. They know the business often better than management and they generally want to see the company succeed (often even more than management). They're a wealth of ideas, some of which aren't all that crazy. Remember that some of the the things that we can't now live without were someone's crazy idea
  • Encourage all the board members and leadership to remember that they've been entrusted with the stewardship of the company and should always keep this in mind
  • Why not have targets for increasing headcount (especially where it makes sense). If your company could hire 1000 people in 2009 can you imagine the positive multiplier effect at work?
  • If things are looking dire for the company, leadership and the board should be willing to step out there and say that they're willing to forgo such and such of their bonuses until things are turned around, when they'll receive bonuses for their concessions. Can you imagine how many employees can be retained with the crazy salaries and bonuses that some of these executives have made?
  • Bonuses can and should be paid, especially when earned, but lets have some common sense in their administration and creation

Photo credit: Credit Crunch 2 courtesy of woodsy.

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