I want to draw your attention to an excellent, thought-provoking, and infuriating post at RealClearPolitics on the link between job reductions and excessive executive pay at the largest companies, a distinctly American phenomenon. Sometimes the connection is a straight-line one, as in the outrageous case of Viacom’s Philippe Dauman, Thomas E. Dooley, and Sumner Redstone’s firing 850 people then awarding themselves 80% of the savings realized by staff reductions in increased compensation for themselves.
Generally, the connection is a bit more roundabout as in the case of IBM’s Samuel Palmisano’s termination of 10,000 IBM employees while his own pay rose by 30%.
This greedy behavior isn’t limited to big corporation CEOs, BTW. The other day I read an article about a teacher’s union president whose pay rose 30% even as the pay of the rank and file teachers remained the same.
There are, essentially, two ways to improve a company’s profitability: you can either cut costs or increase sales. Increasing sales is hard and, frequently, risky. You can re-concentrate your efforts in core businesses, expand the marketing universe for your existing products, or develop new products to find new markets or potentialize your existing markets.
If you’re stupid and hardnosed enough, cutting costs is easy: reduce staff. If the savings realized are used to stabilize the company or expand the business as suggested above it can be necessary and even desireable. When the savings are used solely to increase CEO pay, it’s reprehensible. I don’t believe that any company in the history of the world ever cost-reduced its way to greatness. The objective of a manager should be to maximize shareholder value and you don’t cause a company to grow just by reducing costs. It’s a quick fix and very likely a temporary one.
Take GM, for example. Since 1980 its worldwide unit sales has actually fallen and its U. S. market share has been almost cut in half even as its number of hourly employees has been more than cut in half. Staff reduction alone cut costs but hasn’t improved the company’s prospects.
Let me suggest some reasons for the huge, unjustiable increase in the compensation of top management
- Corrupt corporate governance. The interconnectedness of the directorates of large firms is tremendous and there’s a well-known practice of “you vote for my compensation package and I’ll vote for yours”
- Incompetent corporate governance. I blame large mutual funds for at least part of this. Just making the stock price go up is not enough to run a company well.
- Plain old-fashioned greed. Lack of a moral core.
- Too much emphasis, at least in part derived from the tax code, on short term gains.
- Because they can. This goes back to the incompetent and corrrupt corporate governance but I would also point the finger at the government. There’s been a lot of saber-rattling but not much effective action.
I’ll close with the quotation from Peter Drucker with which the article itself closes because it’s so to the point:
“What’s absolutely unforgivable is the financial benefit top management people get for laying off people,†Drucker said. There’s no excuse for it. No justification. No explanation. This is morally and socially unforgivable, and we’ll pay a very nasty price.â€
This is the emotional core of Occupy and its supporters: the realization that the rich are feeding on the working people, like vultures feeding on carrion.
I don’t think 30 years ago we felt this way. I don’t know if people behaved better or hid their actions better. But now the rich directly profit from pushing working people into poverty. And they convert their increasingly concentrated wealth into political power so that the working people have no recourse.
I have one more explanation for why people do this, and I’ll defer it to Orwell:
It’s fun to crush the little people. It’s a sheer, sociopathic thrill.
There’s a danger of over-generalization. Not every person who’s making more than $350,000 per year is a sociopath who delights in pushing other people down. Not every CEO does so. Not every CEO of a big company does so.
But we’ve got enough people who are willing to push themselves up by pushing others down and far, far more who are just indifferent to the consequences so long as they get theirs that it produces a problem. That’s what I’m talking about in the post when I talk about a “moral core”.
This is not new. It is, unfortunately, a component of human nature. I think that mere scale and the personal empowerment possible today makes this more dangerous than it was in the past.
IMO the prudent course of action is to scale everything down, make it smaller, bring it closer. I don’t see any way for this to happen and, worse, the forces that could make it happen are far more likely to scale things up, make them larger, and push them farther away.
I certainly didn’t feel that way 30 years ago. However, 30 years ago the CEO of a large U. S. company made 40 times what one of his workers did while in France or Germany a comparable CEO made half as much. Now it’s an order of magnitude more. Perhaps that’s the difference. And it’s been going on for 30 years.
Also, no man is a hero to his valet. Through a combination of a more aggressive press and the Internet we now are much more aware of everybody’s business.
blockquote>If the savings realized are used to stabilize the company or expand the business as suggested above it can be necessary and even desirable. When the savings are used solely to increase CEO pay, it’s reprehensible.
This is so true. And, what you are suggesting here is that a CEO or employer has choices as to how to operate his/her business.
One way that can be chosen, is to look at an operation ‘holistically,’ whereby work loads, profits, feedback are shared openly and fairly, both in good and bad times. Workplaces which function under such a paradigm usually have employees who are more committed, longer-term, more inclined to self-monitor their work because of pride in the products/services produced, and have genuine loyalty/affection towards their employer/company, going beyond just the satisfaction felt in getting a good paycheck. Many family owned businesses have these qualities/characteristics ingrained in their code of ethics and management styles.
It’s bigger organizations who tend to lose their human touch of treating employees like they would like to be treated themselves. Mission statements of good intentions, fair business practices to clients and employees, alike, seem to get lost in the daily dog-eat-dog competition to reach the top first, opening doorways for extraordinarily large and arbitrarily arranged forms of compensation for a selected few.
So, how do you temper the latter, while not harming the former? That, to me is the most difficult question.
Some, with a more tainted view of mankind, seem to seek government absolutism over business as the way to rectify fiscal sins of the greedy. However, applying a one-size-fits-all correction, IMO. is the same as using bug spray indiscriminately, which often happens when you solely turn to the government for a more regulated kind of intervention.
I tend to look at the human equation differently, in that there seems to be reoccurring cycles of greed, followed by ones more modulated in self-correction. History, in fact, is an undulating thread of man learning and relearning lessons of better conduct and behavior towards each other. Certainly, it’s appropriate to update or change rules, discouraging untoward actions from getting too out-of-hand. However, there also needs to be caution exerted in how far one goes in restricting and taming our undesirable societal trends, as too harsh a remedy, too great of a pendulum swing, can become an antidote worsening the health of a country, rather than creating pathways back to revitalization and strengthening it.
I just listened to this podcast (I’m a bit behind). I want to read his book, I think he makes a pretty convincing case.
Another way of looking at it is that everything that’s good for a corporation isn’t necessarily good for business. Cut costs by cutting heads and shutting down units, not just unprofitable units but those that aren’t profitable enough. Looks good on the bottom line, makes the corporation look good, but you’re actually doing less business.
I run into this when I explain to people that we need regualtory reform. They say, “But corporations have never done better!” I try to explain that corporations themselves are not actually commerce, but legal entities that may or may not engage in commerce. Regulatioins can be bad for business (see SOX or Dodd-Frank) but not really hurt the big corporations all that much, while making it extremely difficult for smaller companies to either compete with the big corps or do business with them.
We need to keep that in mind – are the regulations good for BUSINESS or just good for the CORPORATIONS.
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And ultimately, the problems of corporate governance are just agency problems, which proves that just because it is mentioned at the beginning of almost every begining finance course in college, no one has any idea what to do about it.
This is the emotional core of Occupy and its supporters: the realization that the rich are feeding on the working people, like vultures feeding on carrion.
I’d be a little more specific. I don’t think people are all that upset about the Steve Jobses of the world (although maybe the should be considering some of his business practices), or the rich athletes or actors (although some of those folks are annoying as hell), but they’re sure as hell mad about what is colloquially refered to as Wall Street. It’s hard to look at the bailouts and not feel that way.
Some thoughts:
1. There seems to be a censensus, although with various levels of sophistication, that poor corporate governance is at work here. I concur, with a caveat. Its not so much that Boards are scratching the backs of other Boards; its that Board’s compensation committees are not doing their jobs, and challenging a CEO to find a better gig if he think’s he/she’s worth it. (eg See the current NBA negotiations) As Jan correctly points out, this is much more a public co phenomemenon; we certainly are willing to say “OK, if you think you can do better elsewhere, have at it dude, or dudette.” It will get sorted out.
2. As for the mutual fund angle, I’m not so sure. (Or any business.) As we always say after we buy a company “you can only do the cost trick once.” We always look to value engineering, Six Sigma, optimizing our operations with a real understanding of profitability by product, channel or customer. And then we find the organization that fits the optimized company. In the public arena if a steady diet of layoffs was required to pump a stock’s price you would pretty much quickly have a sleleton crew………and a worthless, smoking hulk of a company. Its not sustainable. I understand the desire to make “short term earnings” the whipping boy, but its the ultimate fleeting asset and I think weak analysis.
3. As for greed, you all know what I think. An overused and overhyped and too convenient “catch-all explanation.” Greed is everywhere, always has been and always will be……and its not just the province of the corporate suite. To tie it in to Michael’s hallucinogenic tirade…..people have been trying to impose their will on others forever. As Dave pointed out – the public unions. Slavery has existed for thousands of years, current US textbooks notwithstanding. Ever played competitive sports with really competitive people? They want to destroy you physically or psychologically. You can watch it on TV most days of the week.
Hollywood? They don’t play with rubber knives when vying for work. How about politicians? ………and so forth.
The notion that this is some phenomenon unique to “the rich” or to “Big Business” is just a childlike wordview. However, what is true is that certain entities have been given the mechanism to get away with this behavior. Many times its called government. At other times – coming full circle – its poor corporate governance. That brings up a philosophical point:
In the corporate world people abandon their stocks. They don’t do it su much in the market for elective office. So musch candy being thrown around.
In addition, I have to say it brings into question the concept of mutual funds, which really are creatures of diversification and subcontracting governance. If everyone was a stock picker there might be more scrutiny, but at the cost of diversification. Hmmmm.
I think you’re right but I also think that’s not looking at the big picture. The world of the ultra-rich is a pretty small, exclusive club. In that club big incomes are as much a way of keeping score of how you’re doing relative to others in the club as they are the means of buying stuff and living a certain kind of lifestyle. When the income of top marquis actors goes up, so does the income of Viacom execs. It has to. The pecking order requires it.
@Dave Schuler
Yes, executive pay is no longer so much about actual performance as it is about signalling tribal status.
When the income of top marquis actors goes up, so does the income of Viacom execs. It has to.
And as soon as the executives of VIACOM run it into the ground and the claim they’re too big to fail and get 6 trillion in government bailout funds, I’ll get pissed about their salaries too.
I guess you’ll make the point that if VIACOM execs are making the Big Bucks, so too must the execs at Clusterfuck Financial, Inc and Rusty Bucket Deathtrap Industries – keeping up with the Joneses. But I’m only going to be upset when certain industries and companies are selected as winners by TPTB. This is why I think the Occupiers are every bit the yammerheads the Tea Partiers have been -they know they’re being screwed, but in both cases they’re at best only partly identifying the correct targets, while badly mis-identifying how to fix things. I sympathize with the sentiments of both groups, but they’re both useless currently.
WOW. What great ends to football games this weekend!
But I’m only going to be upset when certain industries and companies are selected as winners by TPTB.
You know, I’m going to retract this. There’s plenty to be pissed about beyond the government choosing winners & losers.
“We need to keep that in mind – are the regulations good for BUSINESS or just good for the CORPORATIONS.”
I’d rework this a hair.
Business regulations need to be “good” in the sense that they protect private citizens or competing businesses from the third party effects or predatory actions that a particular business might take. No one in their right mind should have a problem with this if those regulations do not take on an expansionary life of their own, or become twisted to the favor of certain businesses. This, unfortunately is what all too often happens.
What to do about it? You know me: limit the scope of government. But also, if we didn’t have a large portion of the electorate whose ignorant worldview was “kill greedy business/eat the rich” then we might have an electorate that voted in a manner to force pols to enact and enforce reasonable regulation in a rational manner, and not open Pandora’s box of regulatory capture etc………OK, I’m dreaming now.
If we didn’t have a business community that sought to control politics, raid the treasury, screw consumers and disenfranchise voters we might not have the above.
Here’s an easy example: Companies routinely ship food they know misses basic health standards. This isn’t even debatable, there are too many examples of contaminated chicken, meat from downer animals, unwashed fruit, too many cases of supermarkets altering dates of expiration, etc….
They do a cost benefit analysis and decide it’s worth risking a few deaths. They use their political muscle to ensure their “right” to occasionally kill off old people and children.
Cell phone companies, banks, cable companies, credit card companies don’t actually manage to kill people, but they do routinely lie to consumers and steal from their customers.
When there’s push-back from consumers and voters the push-back is derided as over-regulation. And what Dave describes as a lack of moral core is justified on the grounds that a businessman’s only obligation is to turn a profit.
I’ve argued — to much derision from you, as I recall, Drew — that businessmen are not exempt from basic morality, that they retain all the same moral obligations as anyone else and thus must conduct their businesses with an eye to more than mere profit. If they did that we wouldn’t need regulation. Regulation — and the eat the rich mentality — flow from businesses that behave like thieves and assholes.
If business organizations and lobbying groups spent half as much time cracking down on their worst members as they spend defending the criminal and immoral behavior of their worst members, we’d have a lot less need for regs and a lot less rage at the rich. Shorter: if businesses self-regulated, we’d let them. They don’t, so we do.
Business regulations need to be “good†in the sense that they protect private citizens or competing businesses from the third party effects or predatory actions that a particular business might take.
Perhaps I should have said good for commerce instead of good for business. I didn’t mean simply good for the businesses themselves. Thanks for creating clarification.
Micheal –
You seem to be stuck in the notion tha the only bad people are business people. Me: plenty of those folks to go around, in and out of business. Me II: Don’t give those bad people the mechanisms to force their will. You: if we only had the “right” regulations and the “right” people to enforce them, life would be a peach. Empirically your argument is a mess. Did you see the article just today about how well “Wall Street” is doing under Obama……………not that they make campaign contributions or anything. (snicker)
You really need to stop going into the basement and reading Charles Dickens by candlelight while listening to latter day Pink Floyd.
Drew:
Show me where I’ve said or even implied that the only bad people are in business. Naturally you don’t address the specific examples, like dangerous food or bad drugs or dishonest billing, because those don’t fit into your grand unifying theory that “Government is the problem.”
Simple question:
Did dangerous foods find their way to market before the FDA and the USDA? If so then it’s absurd to posit that the government caused events which preceded it on the big cosmic timeline. Even the government can’t time travel.
So, there was a problem. That problem existed because of the businessmen involved. And then came government. Cause then effect. See how that arrow of time thing works?