Rail Against the Chief

Originally posted September 2010

Executive compensation and what is seen as near gluttonous bonus payments during a time when the average American is more likely hurting than not has been a recurring theme in the media.  The Institute for Policy Research has completed its 2009 study of CEO pay titled CEO Pay and the Great Recession that compares for those companies that are the top “layoffs leaders” for the 17 month period, November 1, 2008 to April 1 2010, with the total compensation paid to each CEO for the year 2009.

There are a couple things that aren’t well articulated in either the report or the article covering it by Roland Jones for msnbc.com (CEOs lay off thousands, rake in millions) by Roland Jones.

First, many of the circumstances for the companies listed are different. Certainly there are many who are downsizing as a result of the economic downturn, but there are also companies merging, companies in turnaround situations, companies whose business strategies are being revised.   Drawing meaningful conclusions about this data because there is a perceived “pattern” on the surface is imprudent.  For example, the 8,000 layoffs at Merck is a far different circumstance than the 8,000 layoffs at Home Depot.  Merck’s layoffs were a result of a merger with Schering Plough (often called “synergies”, these layoffs are intended to eliminate redundancies).  Home Depot’s layoffs were a result of the decline in housing starts (that if we go back far enough we might be blame on AIG). That being said, we are incensed by bonuses paid to CEOs of TARP recipient companies.  Clearly that bonus was paid by taxpayers, and in part by those laid off and also de-legitimizes performance-based bonuses paid to CEOs in non-TARP companies on that list. 

Second, as Jones does point out in the article, “…a public company’s chief executive has a fiduciary obligation to maximize value for the owners of a corporation — its shareholders.”  And there are essentially three ways to do this: grow the “top line”  (i.e., increase revenue), decrease the “bottom line” cost (i.e., reduce costs) or do both. Top line growth is very difficult to achieve in a recession.  So in order for CEOs to meet their “fiduciary obligation” to shareholders during a recession, they must reduce costs and one of the biggest cost for US businesses (and perhaps the simplest to cut) is human resources. The real question here is shouldn’t CEO’s have the fiduciary obligation to shareholders to both increase revenues AND decrease costs to the fullest extent possible regardless of the economy?  We find it impossible to believe that every one of perhaps 8 million jobs lost since the beginning of 2009 was absolutely necessary in 2008 or before.  Would those employees who lost their jobs in 2009 or later have preferred to be fired earlier? I doubt it.  But why didn’t the CEOs identify those unnecessary human resource costs sooner?   Maybe they were focusing on revenue growth.  The ability to drive revenue growth and cost reduction may be far different leadership competencies, but CEOs must keep them both continually at the  “top of mind”.

Last, and certainly not least, is the fact that CEOs have employment agreements and companies  have compensation plans that describe how CEOs will be paid.   These agreements and plans are developed and overseen by the Board of Directors usually with the help of executive compensation consultants.
Grahall has in many of our blogs railed against poorly designed compensation plans that drive behaviors that are inconsistent with business strategy.  We have also spoken out also against entrenched Boards who are “advised” by conflicted consultants. (Read more in Grahall’s blog Caveat Emptor Updated.)  Perhaps the problem for these 50 companies and many others not on this list, is that the compensation structure, which we are Grahall call Money, Mix and Messages (MMM) is not properly designed to drive primary business strategy, that is profitability.  (Read more in Grahall’s blog Creating Quality Compensation.)  It’s less about “how much” the CEO got paid (i.e. the “money” component in Grahall language), and more about the “how” (the “mix”) and the “why” (the “messages”).  If these three parts of the equation (money, mix and messages) are not properly aligned, then CEOs (and other executives for that matter) will be incorrectly paid.

If a company designs a compensation program for its CEO and other executives that drives short term cost cutting and long term revenue growth regardless of the economic condition, American businesses, their shareholders and American workers will be better off.